Simpler Tax for Self-Employed & Small Businesses – Same Year Tax Reporting by 2023

Author: Cerith Williams, Client Manager and Cloud Specialist at LHP

Simpler Tax for The Self-Employed & Small Business

New HMRC reforms to the tax system involving unincorporated businesses filling out their tax returns so that profits are taxed the year they are earned, have been recently announced. This simplifying of tax for the self-employed should mean less time on tax admin and more time on the business. The rule change affects the self-employed, partnerships, trusts, and estates with trading income.

These changes take effect on April 2023 (2022 if you include the transition) for small businesses (taxed on profits arising in a tax year), and should help businesses spend less time filing taxes and align to how self-employed profits are taxed – for example property and investment income.

What does it mean exactly?

This proposal changes the current reporting to a ‘tax year basis’ with effect from 2023-2024, so that a business’s profit or loss for a tax year is the profit or loss arising in the tax year itself, regardless of its accounting date. This removes ‘basis period rules’ and prevents creation of further ‘overlap relief’ (tax relief for any double tax paid on overlap profits).

On transition to the proposed tax year basis, April 2022-2023 will see all business basis periods aligned to the tax year and all outstanding overlap relief given. From April 2023 the new regime will be up and running.

Businesses with higher profits

For businesses with higher profits in 2022-23 (due to the change in basis), an election to spread additional profits over (up to) 5 years is currently under consideration. This will help those that will have to adjust for a period of time to accelerated tax payments.

Overlap relief is normally given when a business changes its accounting date or stops trading, if 2 of its basis periods have overlapped in the past. The current system is more complex for some businesses, as the time period of their accounts is different to the tax year. The reform will mean businesses pay tax on profits in the tax year they actually occur. For further information on this reform, you can visit the HMRC website.

Making Tax Digital

This change aligns with the government’s plans to provide self-employed business owners with a more modern integrated service through Making Tax Digital (MTD) for Income Tax. This will help reduce errors and ensure the self-employed get their tax right first time. The change to the time periods (reporting their tax) will also reduce the number of times those with several sources of income need to report income under MTD for Income Tax.

This initiative forms a big drive for LHP as most businesses will need to move to cloud accounting software to be compliant. We’re geared up to this as Xero Platinum Partners, offering packages, training and support. We also provide QuickBooks and Sage packages and training. Our team is highly collaborative, tech savvy and believes in investing in staff and sharing knowledge across the team.

Potential issues

Many business owners are likely to change their organisation accounting date to 31 March or 5 April, to save on preparing yearly estimates, if that’s not their yearly accounting date already. This could make it difficult for those calculating what to pay into pensions, as they won’t know what their taxable income is before 5 April each year. 

As a business owner you may struggle to find cash to pay accelerated tax, even with the Government payment spreading, should it go ahead. You may need to estimate a part of your profit share yearly and then update estimates for actual figures once accounts have been finalised. This could mean tax is over/underpaid for a time.  If you are affected by this, get in touch, we can help.

Let’s Talk

For help with these tax changes including moving to cloud accounting for real-time accounts, please don’t hesitate to contact team LHP. Our tax specialists and advisors are based in 5 offices across South Wales with over 85 years of experience in helping small businesses thrive, adapt and grow. Let’s Talk.