Reforms to tax calculations for the self-employed, revealed in the Budget book, will result in a significant acceleration of tax payments by businesses affected by the change, says the Chartered Institute of Taxation.
The £1.7 billion raised by the measure over the next five years also makes it the biggest tax-raising measure confirmed in the Autumn Budget and Spending Review 2021. For our Budget round-up, click here.
The government confirmed plans to reform the ‘basis period’ rules that determine how trading income for unincorporated businesses (sole traders and partnerships) is allocated to years. The proposal is to change the allocation so that it will be based on the profits or losses arising in the actual tax year, rather than (as now) in accordance with the accounting period ending in the year.
The new ‘tax year basis’ will apply from 2024-25, in anticipation of the start of Making Tax Digital for income tax self-assessment in April 2024, with a transition to the new regime in the tax year 2023-24.
Change to hit impacted businesses hard
Pete Miller, Chair of the CIOT’s Owner Managed Business Committee, said: “This change will mean that affected businesses will pay tax on profits for more than a 12-month period in the year 2023 to 2024 as they transition into the new ‘tax year basis’.
“Whilst it will be possible to spread any excess profits over five tax years, the Exchequer Impact of the change is significant. Between 2024-25 and 2026-27 it is expected to raise an extra £1.715bn.
“There will be further impacts over the following two years so the overall impact could be over £2bn. This is a significant acceleration in the amount of tax revenues flowing into the Exchequer.”
Businesses urged to weigh up accounting period change
Businesses that don’t already have an accounting period end of either 31 March or 5 April will need to weigh up the costs and benefits of keeping their existing accounting date compared to moving it to 5 April or 31 March to avoid additional complexity, such as time-apportioning their profits into the appropriate tax years and needing to use estimates if their accounts have not been finalised by the time they need to submit their self-assessment to HMRC.
Miller continued: “The impact assessment published today recognises that there will be one-off costs for businesses including familiarisation with the rules, updating software, and deciding whether to change their accounting date to 31 March or 5 April. However, the estimated cost of this is considered to be negligible, which we think is unrealistic.
Reform predicted to cause suffering
“The continuing annual costs are estimated to be £9.1m; this will be mainly the additional compliance involved for those businesses for which it will not be commercially practical or possible to change their existing accounting date. However, the ongoing savings are estimated to be £10.2m, meaning that the overall impact is a negative £1.1m.
“Given the additional ongoing compliance and administrative burdens that we believe affected businesses will suffer to comply with the new rules, we find it hard to believe that these are outweighed by savings elsewhere.”