Almost 300,000 sole traders could face higher tax bills than otherwise expected next year, following proposals by the Government to change the date small businesses report their profits.
The plans change the basis period rules from a ‘current year basis’ to a ‘tax year basis’. The transition would take place from 2022 to 2023. The changes would come into effect from 2023 to 2024.
A business’s profit or loss for a tax year would be the profit or loss that occurs in the actual tax year itself, regardless of its accounting date.
The changes to tax bills will also eat into the amount of working capital sole traders have for five years as they now have to pay more tax earlier.
A consultation and draft tax bills legislation has revealed plans to alter the 12-month period sole traders use to calculate profits, to bring everyone in line with either March 31 or the end of the tax year on April 5.
This will result in the date sole traders pay their tax bills being brought forward.
The measure is expected to affect 280,000 sole traders, based on tax returns for 2019/20.
Currently, businesses can choose the date to which they draw up annual accounts. The date they have to pay tax falls at the end of the tax year in which their accounting period stops.
But from 2023, the Government has proposed that businesses and their partners be required to align their taxable profits with the rest of the country, even if they prepare their accounts to a different date.
There will be a transition year starting from April 2022 for businesses that do not currently use either March 31 or April 5 as a tax date. During it, affected firms will have to pay tax on more than one year’s profits — in the worst case 23 months — to be ready for the new system’s start in April 2023.