August 26, 2021
The past year and a half has been riddled with changes as far as the accounting and taxation world has gone. But with HMRC keen to introduce more changes for the self-employed from 2022 most business owners are worried about what exactly these changes may entail. After all, no business owner wants to risk a HMRC investigation due to failure to meet with compliance of the legislation. HMRC is in fact thinking along the lines of changes that will ultimately affect mainly the income tax related payments of sole traders as well as partnership firms.
Why the change?
After all the existent changes why are the HMRC introducing even more changes one does wonder. This time the focus seems to be on Making Tax Digital (MTD). The changes are geared towards a better alignment towards filing dates for MTD. This may result in slightly higher tax bills for the next tax year, 2022-23 when they go to file their HMRC tax return.
The situation at present
The accounting date (or yearend date) of a business at present differs from the tax year but when it comes to income tax payments and consideration of profits for relief on the same, the tax year is considered. This in the long run can lead to profits overlapping as they will be considered twice in some situations.
What exactly is the change about?
The HMRC now want to standardise things so that the tax year becomes the prime benchmark when it comes to the calculation of income tax in the year. A business can have the freedom to choose the accounting date. However, all tax calculations will factor in the tax year and not the calendar year.
Who will be affected by the changes?
A business than is unincorporated and whose accounting date fails to end between the period 31st March and 5th April will be affected by this change. Thus, there are going to be a lot of affected businesses out there.
How do things work out?
As an illustration we can consider a business that has its accounting year end as 30th April (thus, exceeding the 5th April period timeframe given before). The accounting period and income tax collection thus, factors in the date 30th April. Now coming to the HMRC tax return of 2021-22; the profits considered would be only till 30th April 2021. The year after that, i.e. 2022-23 would be considered to be the transitional year. This is when the tax-year basis will first be applied and so profits of that accounting year to 30th April 2022 will have to be considered in the tax return as well as profits that were derived between the period 1st May 2022 to 5th April 2023.
Thus, if you go to see, the profits of twenty-three months are considered that can be spread of 5 years if required due to transitional relief.
What can business owners do?
Business owners do not need to change their accounting period but an important thing to note is that this change can make filing deadlines confusing. They are best served by checking about the overlapping relief that can be got from the HMRC.
How we can prove to be of assistance?
Doshi Accountants can assist your business in these changing times by ensuring that you remain compliant with the HMRC as well as standing with you if there is any HMRC investigation. We can help make MTD easier and the transition period less of a hassle. All you need to do is contact us for a no-obligation, free of charge consultation that will take place at your business office premises at a time of your convenience.