Tax experts are concerned that the self-employed are unaware of an HMRC rule change on reporting profits, according to the Financial Times.
The change, known as Basis Period Reform, will affect 528,000 sole traders and partnerships whose accounting years don’t end on April 5 or March 31. From April 2024, they’ll have to report their taxable profits to HMRC up until April 5, even if their accounting year ends at a different time.
The Financial Times reports that the change has not been widely publicised, so businesses without tax advisors may simply not know of the new rule.
The idea is that businesses are transitioning in the 2023/24 tax year – and the government will be charging more than 12 months’ worth of profit. That means that you will need to report profit from the day after your accounting year end in 2022/23 up to April 5 2024. The start of the policy was pushed back from April 2023 to April 2024 following a backlash from business and tax professionals.
If you’re affected, you can lessen the impact by claiming any ‘Overlap Relief’ that you may be entitled to. This is for overlap profits, i.e. profit covering more than 12 months, otherwise known as transition profit. This means you’ll be able to spread transition profit over the following years up to the 2027/28 tax year.
About a third of partnerships are believed to be affected, says the consultation document on the change. It will also affect around seven per cent of sole traders such as hairdressers, construction workers and taxi drivers.
HMRC said that the changes would prevent double taxation and make sure that profits are only taxed once: “This reform will simplify the current complex and confusing basis period rules with a single, consistent basis for all businesses,” it said.
“It is a revenue-neutral measure and the Office for Budget Responsibility said the idea that is raises tax is a fiscal illusion.”
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