For a long time unincorporated businesses had to put up with the previous year basis of assessment. Profits for an accounting year ended in the previous tax year were assessed in the current tax year. It was all very complex, particularly if commencement and cessation adjustments were needed, but it actually worked and we grew quite fond of it! It remained in place for the best part of half a century.
Then it was changed to facilitate computerisation. The previous year basis was dumped in the late 1990s in favour of the current year basis of assessment. So whether your accounting year ends on 30 April 2021 or on 31 March 2022 both dates fall inside the 2021/22 tax year and this determines the year of assessment. Again, after some teething problems, this worked well for the best part of a quarter of a century.
The new proposal is a refinement of the current year basis. The idea is to tax profits earned in the tax year irrespective of the accounting year end. This will mean that businesses will have to accept an income tax year basis of assessment. The effect of this is that where accounts are not drawn up to 31 March (or 5 April) it will be necessary to apportion profits of two sets of accounts to produce the taxable profit for the tax year.
Example 1
Conrad is a self-employed thatcher based in Essex. He makes up his accounts to 30 September each year. His profits for the tax year 2025/26 will be calculated as follows:
Profit to 30.09.2025 x 6/12 months; plus
Profit to 30.09.2026 x 6/12 months.
Conrad is not the quickest off the mark when it comes to getting records to his accountant. He normally delivers them in a plastic bag the following April. The new arrangement is going to cause him and particularly his accountant quite a problem.
Example 2
Harland is in partnership with his wife and two sons providing medical supplies. They make up accounts to 31 December. Their taxable profits for the 2025/26 tax year will be calculated as follows:
Profit to 31.12.2025 x 9/12 months; plus
Profit to 31.12.2026 x 3/12 months.
Harland can be relied on to get his end of year records to his accountant within six weeks but how is he going to meet a 31 January deadline for submission of partnership and personal tax returns as well as payment of tax?
Then throw in the following:
- Under the Government’s proposals the new regime will be in place for 2023/24 with 2022/23 being a transitional year.
- No changes are proposed for the filing/payment date of 31st January.
- In many instances it will be necessary for businesses to use provisional figures for the purposes of completing tax returns, estimating the amount of taxable profit arising in the final months of the tax year. They would then have to submit an amendment when precise information becomes available-perhaps many months later. So in a large partnership of, say, eight partners it will be necessary to submit an amended partnership tax return and eight amended personal tax returns in addition to the originals.
- The transitional year 2022/23 (which is only eight months away) will produce winners and losers. Some businesses will be taxed on more than twelve months’ worth of profits in one year. A special facility is proposed to elect for the tax on excess profits to be spread over 5 years. But who wants to pay additional tax simply because the Government is changing the goalposts?
- MTD - making tax digital - is set to start in 2023.
- The Government has issued draft legislation already. This is open for consultation until 14 September – only six weeks away. An autumn Finance Bill is on the cards.
C&H Stedman will be following developments on these proposals very closely and will issue a further note later.
C&H Stedman
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