A little-publicised change to the way taxable profits are calculated will see around half a million sole traders and partners in businesses facing bigger tax bills next year.
From 6 April 2024, 528,000 self-employed workers will move from the current-year basis to the tax-year basis. This will change how these businesses allocate their earnings and profits.
As part of this, many affected will end up paying tax on more than 12 months of profit – which means higher tax bills.
HMRC has admitted the change will have “a significant impact” and will “adversely affect businesses with accounting dates not aligned with the tax year”.
Even so, there’s been little communication about the change, leaving many unprepared. With less than six months until it lands, now’s a good time to understand exactly what’s changing.
Read on for everything you need to know…
In short, HMRC is changing the way that earnings are allocated for tax purposes.
Rather than allocating your profits to an accounting year, with your chosen year-end accounting date – called the ‘current-year basis’ – you’ll have to allocate profits to a tax year. This is called the ‘tax-year basis’.
So far, so straightforward – ish...
However, the accounting years of affected businesses now run right up to the end of the current tax year (5 April 2024). It means HMRC will collect tax on over 12 months of profit. In worst-case scenarios, some will pay tax on almost two years of earnings at once.
Speaking to the Telegraph recently, our CEO, Seb Maley, said the change will result in “bigger tax bills for hundreds of thousands of self-employed people at an already difficult time”.
Any sole traders or partners in businesses that don’t draw up their accounts on dates between March 31 and April 5 are affected by this change. If your year-end accounting date isn’t in that period, you may well be impacted.
If you are, it’s time to work out what your new tax liability will be. However, due to the variability in accounting periods and profits, calculating this can be tricky. It goes without saying that an accountant can help you navigate the change.
If you don’t have an accountant, it’s worth bearing in mind that Qdos customers receive a 35% discount on Self Assessment services from Crunch, which is a leading accountancy for self-employed workers.
The change from current-year basis to tax-year basis reporting has been billed as a simplification of the tax system – and in time, it might well make life easier.
But in the short term, it’s more likely to cause confusion and put the finances of self-employed people under greater strain.
It’s easy to make mistakes when things are this complicated. Unfortunately, HMRC can be aggressive in how it conducts investigations and enquiries into any mistakes and perceived misconduct on tax returns.
In this environment, it pays to be proactive. As well as engaging an accountant, it’s worth considering Tax Enquiry Insurance.
Our award-winning cover will protect you from a range of tax enquiries and defence costs – offering peace of mind and financial protection when you need it most.
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