As the accountancy industry had speculated, we expected, and were granted, more tax by stealth in the October budget.
This time, it was the self-employed who will potentially, be out of pocket.
It will affect all self-employed businesses – sole traders and partnerships – who presently trade with a year end that is different from the end of the tax year (5th of April or 31 March).
Traders who presently have a 31 March or 5 April year end will not be affected.
During the tax 2023-24, those businesses who are affected, will be transitioning to an actual year basis. For example, self-employed businesses that presently have a 30 April year end date will be taxed in 2021-22 on profits for the year to 30 April 2021.
This means, when we transition to an actual year basis during 2023-24 (for MTD), the profits for the year to 30 April 2023 plus the period from 1 May 2023 to 31 March 2024 will be taxed in 2023-24.
This adjustment to an actual year basis, rather than the accounts year ending in a tax year, is where the stealth element shows its hand.
By enforcing catch-up in this way, the Treasury will potentially gather in tax in one tax year on trading profits of more than one year.
There is a relief that will help to reduce this tax hit; it is called overlap relief. It will be based on profits that were effectively used twice when the opening years’ calculations were assessed by HMRC.
We recommend that any traders with a year end other than 31 March or 5 April, consider their options as it may be beneficial to make this change to an actual basis before 2023-24. Its only by crunching the numbers, and considering the prospects for your business, that you can minimise any impact on future tax payments.