Upcoming changes have been labelled “a very serious tax grab” by industry experts
Over half a million sole traders and partnerships are on the verge of “sleepwalking” into a tax trap at the start of the new tax year as a result of changes to reporting schedules.
As reported in the Financial Times, from 6th April 2024, around half a million self-employed workers – including sole traders and partnerships – will shift from current-year basis reporting to tax-year basis reporting.
This means these businesses must report and pay their taxable profits to HMRC by the end of each tax year, instead of their chosen year-end accounting dates.
As part of the transition to the new reporting basis, HMRC will collect as much as 23 months of tax in one swoop, rather than just 12. The government’s own policy paper admits this will have “a significant impact on all self-employed traders and partners… who do not currently draw up their accounts to 5 April or 31 March”.
Compounding the issue is the fact that the upcoming change hasn’t been widely publicised or communicated; no further details have been added to the policy page since its publication in October 2021.
Changes likely to impact cashflow
From next April, all businesses in scope of the change will have to report their taxable profits by the end of each tax year instead of the year-end accounting date they have previously used.
During the transitional period, many businesses will have accounting years running for longer than 12 months; some up to a maximum of 23 months. All earnings in this period will be subject to tax, meaning many businesses can expect their first tax bill to be much higher than those they have previously received.
In an attempt to limit the impact of the change, HMRC will allow businesses to either spread their “transitional profit” over the next five tax years or make one full payment in 2025.
Both options are likely to lead to cash flow challenges. But for the worst affected businesses – those with up to 23 months of taxable earnings – the second option means they will end up paying tax on almost two years’ worth of profit at once.
Alongside the immediate financial impact, there will also be a protracted administrative burden for workers who may need to maintain two sets of financial accounts while adjusting to the change.
Higher effective tax rate on the same earnings
The aim of the change is to “create a simpler, fairer and more transparent set of rules for the allocation of trading to income tax years”. However, leading tax experts are critical of the move, with the policy coming into effect at an already difficult time.
Speaking to the Telegraph in its coverage of the upcoming changes, Emma Rawson – a Technical Officer at the Association of Taxation Technicians – said the change will still be “uncomfortable” for many self-employed workers.
“Even if you claim the relief, you’re still paying a higher tax bill despite the fact you haven’t made more money”, said Rawson. “That’s going to be uncomfortable for a lot of people, especially in the current economic climate”.
Tax cuts on the horizon at Autumn Statement?
While the move may simplify the business tax landscape over the longer term, its immediate impact is likely to be negative.
The change is also another adjustment for the UK’s self-employed workers, who have faced years of tax hikes.
And with the Autumn Statement approaching – due to be held on 22nd November – the government is under pressure to offer some respite through meaningful tax cuts.
Recent media reports suggest that there may be enough “wiggle room” in the Chancellor’s budget to allow for tax cuts of some description. Any announcement on lower taxes would help to mitigate the impact of the shift from current year basis rules to the tax year basis.
This, in turn, will help to alleviate the financial pressures that self-employed workers continue to face during the cost of living crisis.