The government has recently proposed plans to change the date that sole traders and other small businesses announce their profits, which could mean thousands will be getting larger bills come 2022. Read on to find out how the suggested tax changes may affect you.
Next year, nearly 300,000 sole traders will be facing bigger tax bills than initially expected, as the government has announced a proposal to change the date small businesses announce their profits.
This change will also affect partners working in accountancy and law firms and will generate billions of pounds for the Treasury, as they will receive money years before they would have done otherwise.
These amendments to tax bills will also alter the amount of working capital sole traders have for five years as they now have to pay more tax earlier.
Last month, a consultation and draft tax bills legislation was published and revealed plans to change the 12-month period sole traders use to calculate profits, so everyone would be in line with either March 31 or April 5, the end of the tax year.
This means that the date sole traders need to pay their tax bills will be brought forward. At the moment, small businesses are able to defer by having a later date for their end-of-accounting year.
According to the Financial Times, the measure is set to affect around 280,000 sole traders, based on tax returns for 2019/2020.
Currently, businesses can choose the date when they wish to draw up annual accounts. The date they need to pay tax comes at the end of the tax year, when the accounting period stops.
However, from 2023, the government has proposed a change of plans, which sees businesses and their partners required to align their taxable profits with the rest of the country, even if they prepare their accounts for a different date.
There will be a transition year, which starts in April 2022 and is for businesses that do not currently use March 31 or April 5 as a tax date. During this period, affected firms will have to pay tax on more than one year’s profits, in order to be ready for the new system’s start in April 2023. In the worst cases, businesses may be paying tax for 23 months’ worth of profits.
Joe Spencer, a partner at accountancy firm MHA Macintyre Hudson, believes that the proposed tax changes to simplify reporting could actually be beneficial for small business owners and the self-employed, as they will be able to access tax relief on overlapping profits far earlier than they can at the minute.
Spencer said: “The Treasury’s newly announced tax reforms will bring welcome simplicity to tax reporting for the self-employed and small businesses across the UK. They are an indication of HMRC’s attempt to tax profits earlier, bringing the tax point for these groups in line with those who are employed.”
“The current tax system is unnecessarily complex for small businesses, particularly over the so-called ‘basis periods’, as businesses that start and draw up their accounts to a different date than the end of the tax year are often the victims of profits being taxed twice. Accessing the appropriate tax relief for this is complex and can take a long time.”
“Although the full details of the reforms are yet to be revealed, if they will enable small businesses to access tax relief on overlapping profits earlier, which seems to be the government’s intent, this will be a significant win for business owners, especially for liquidity and administrative purposes.”
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