Owner-Managed Businesses

Treasury announces important tax reporting changes for the self-employed from 2023

The government has recently published draft legislation that may mean that sole traders and partners in a partnership potentially face an acceleration in the date they pay tax on their profits.

1st September 2021


In a consultation paper that runs to 31 August, HMRC is planning to alter the period such individuals use to calculate profits to the tax year end date of 5 April. The impact of these proposed changes is that the date such individuals pay tax on their taxable profits will be brought forward, if their year-end date is not already aligned with the tax year end. The change is due to be made from the 2022/2023 tax year onwards.

Currently, businesses can choose the date to which they submit their annual accounts, so in some cases a business pays tax on its profits sometime after the profits have been made. Such businesses can still prepare the accounts to the same date but will have to split the profits in the future to show them on different years’ tax returns. The proposed change could particularity effect businesses with a year-end date early in a tax year, for example 30th April.

Under the proposed changes, such individuals will have to report taxable profits in line with other sources of income which is taxed on a tax year basis, such as property income. The consultation paper proposes a transitional year, being the 2022/2023 tax year. In this transitional year, affected individuals will potentially have to pay tax on more than one year’s profits (in the worst case up to 23 months) to comply with the new system. It is anticipated that transitional relief will be available though to spread the effect over five years of accelerating when profits are taxed. In addition, care will need be to be taken to ensure any overlap relief available is claimed when the change is made. Such overlap may have arisen in the past when profits were double taxed, so it is important that this figure has been calculated and recorded.

Click here to access the Treasury’s announcement.

Chris Bowles, who specialises in advising small businesses comments ‘I’m quite surprised by the suggested timetable for these changes which could have quite an impact on the cash flow for may sole traders, particularly coming so close to the challenges small businesses have had to face due to the coronavirus pandemic.

Whilst we welcome the fact that these reforms should bring more simplicity to the tax reporting of smaller businesses, the planned timing adds yet another burden on cash-strapped firms who will need to start to think about getting ready for this now.’


How will these reforms impact small business owners?

Essentially, the changes bring forward the tax point and eliminate what are known as overlap profits. Under the current arrangement, businesses that complete their accounts to a different date than the end of the tax year can find that their profits are taxed twice and accessing any tax relief can be complex and time consuming. Another issue could be the impact that paying tax on profits earlier than before may have on cash flow.

Bowles adds ‘Ultimately, the alignment of the tax year will simplify tax reporting for many small business owners. The perceived complexity of having to split a non-tax year aligned accounting year end will be the catalyst for traders to simply switch their year-end to either 31 March or 5 April before the transitional period… but they should start taking advice on this as early as possible.

‘These reforms also tie in with the Making Tax Digital initiative and will serve to bring the tax point forward for some businesses. This is all part of the government’s plan to collect tax earlier on profits and create more of a level-playing-field between the self-employed and Schedule E employees.’

For further information please contact your usual adviser in the first instance, or alternatively click here…