Increased Costs on the Horizon For The Self-employed.

Reform of income tax basis period for the self-employed – It’s time to plan

Following on from our blog a couple of months ago, HMRC have confirmed that its proposals will now come in from the 2024/25 tax year, when Making Tax Digital for Income Tax (MTDITSA) will also be introduced. HMRC say the reform aims to create a simpler, fairer and more transparent set of rules. However, it may also mean additional complexities for many businesses and increased costs of compliance.

To recap

Under the current system, tax returns completed by the self-employed, are based on profits from a set of accounts that ends in a tax year (“current year basis”). The new rules will mean the self-employed (including partnerships) will be taxed on profits arising in a tax year (“tax year basis”).

What does this mean?

If you do not prepare annual accounts up to 5th April (or 31 March) and are self-employed or in partnership you will be affected. This includes those who are starting in business. Businesses with an end of year different to the 5th April (or 31 March), so for example 30 April, will have to apportion profits (or losses) from different accounting years to fit the tax year.

There will be a transition year in 2023/24 when businesses will have their basis period moved to the end of the tax year and any overlap relief brought forward will be used up.

What are the implications of these new rules?

Implications for the self-employed include:

  • Possible increased costs as a business may need to finalise annual accounts and tax computations earlier
  • Increased costs of calculating profits for the transition period in 2023/24 and subsequent years. Businesses with a year end of 30 April could be particularly affected.
  • Administrative burden of changing/updating systems
  • The need to plan and to take advice
  • The changes could alter the optimal date for retiring partners

Jill Evenden says “as expected these new rules are coming in and as the transitional year is not far away we recommend you discuss and plan these changes as soon as you can with your advisor. Don’t leave it too late.”

How Can I help?

Contact us to find out what planning we offer to avoid the increased costs and burden of this change.


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