**On 23 September 2021, one month after we posted this blog, Westminster announced that the change to tax-year basis will not come into effect before April 2024, the same time MTD for ITSA is due to start – one year later than planned.**
Plans to reform basis periods could result in more self-employed taxpayers submitting tax returns via Making Tax Digital in 2023.
Westminster recently published a consultation alongside draft legislation, to gauge business opinion on allocating trading profits to tax years.
Currently, the income tax rules for the self-employed see trading profits allocated to accounting period end dates.
Most of our sole trader clients work to 5 April, but this will affect limited liability partnerships, business partnerships – including some GP practices.
Basis period reform
Should the proposal to reform basis periods be written into law, they will apply from 2023/24 with 2022/23 being a transitional tax year.
In this transitional period, some businesses will report profits from the end of the previous period (2021/22) up to 5 April 2023.
Some of the businesses could end up being assessed on almost two years’ trading profits, although there are reliefs to lessen the impact.
Overlap relief should be available to reduce the taxable profit in this period, while transitional relief can spread the extra income over five tax years.
Businesses with a 31 March 2023 accounting period end date will report profits up to this date, although it will be deemed to be 5 April 2023.
The subsequent accounting period will start on 6 April 2023.
HMRC estimates this will impact on around 7% of sole traders and 33% of business partnerships throughout the UK.
Making Tax Digital for income tax
As fate would have it, we will go into Making Tax Digital for income tax self-assessment (MTD for ITSA) in next month’s blog.
But based on the draft legislation accompanying this consultation, MTD for ITSA will be mandatory for most of the self-employed from 6 April 2023.
It would be mandatory for existing business owners who trade to a 5 April year-end, and all unincorporated property firms with profits over £10,000.
Existing traders who work to a 31 March year-end will be spared MTD for ITSA – but only for 12 months, until 1 April 2024.
Unincorporated businesses with other accounting period end dates would need to join MTD for ITSA at different dates before 1 April 2024.
If, for example, your year-end date is 30 June, MTD for ITSA starts from 1 July 2023. For 31 December, MTD for ITSA starts from 1 January 2024, and so on.
Steps to take now
Regardless of this proposal being rubber-stamped or not, MTD for ITSA will affect everyone who is self-employed in the near future.
To comply with this, you might need to implement HMRC-approved software to keep digital records and meet your reporting requirements.
We can help with every step of moving towards cloud accounting, along with any aspect of self-assessment tax planning.
Call 0141 221 2257 or email firstname.lastname@example.org to find out how we can be of assistance.