All change for unincorporated businesses in preparation for Making Tax Digital
It’s all change for unincorporated businesses who don’t prepare their accounts to 31 March (or 5 April) and …
… Sole Traders, Partnerships and Trusts/Estates who have trading income will all be affected; and it’s all in preparation for Making Tax Digital (MTD)!
From April 2024, businesses will be taxed on profit which actually arises in a tax year irrespective of the accounting date accounts are drawn up to but the transition will take place from April 2023 – in around nine months’ time.
There could be unexpected and unwelcome consequences of being taxed on a tax-year basis. Accounts preparation will need to be slicker and those with accounting dates later in the tax year may need to use estimated figures in their MTD reporting which could bring additional costs when the accounts are finalised.
This proposed change will have no effect on those that prepare accounts to 31 March (or 5 April) but could have a considerable impact on everyone else. So, without any planning:
- If you prepare your accounts to 30 April, you will be reporting 23 months of profit in 2023/24 albeit some of this transitional profit may be spread over five tax years to ease the tax burden; but will this spreading negatively affect the rate of income tax you’ll pay in the future?
Do you have any Overlap Relief you can deduct?
Working with a 30 April year-end means that some of your tax liability is paid 21 months after the end of your accounting date. Under the new ‘basis period’ rules, your tax will be paid much earlier than before. This acceleration of the tax payment date will affect your cash flow and working capital.
- If your accounting date is later in the tax year, you will probably have to estimate your results to be in a position to complete and file MTD returns online. This will be less of a problem for those already keeping their business records digitally - in real-time - but when the final results are known, the Tax Returns may need amending.
If your profits have wildly fluctuated over the last couple of years and/or more recently, your business could realise losses; call us on 01223 810100 to discuss if changing your accounting date to bank Overlap Profits and accelerate results into a tax year, in which you may be liable to tax at a lower rate could help More radically, you could look at incorporating your business – Companies are unaffected by the basis period reform.