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- Advisory
- Alice Stephenson – Founder & CEO, Stephenson Law
- All News
- ALLSTARS EARLY CAREER PROGRAMMES
- APPRENTICES
- April Bembridge – Chief People Officer, Cooper Parry
- Are You Claiming The Right Amount? Gated
- AUDIT – WHAT OUR CLIENTS SAY
- Audit and Assurance
- AUDIT FOR AIM LISTED COMPANIES
- B CORP
- Bundle and Pricing Options
- BUSINESS SERVICES INSIGHTS
- BUSINESS STRUCTURING
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- Business Tax
- CAPITAL ALLOWANCES
- CAPITAL GAINS TAX
- Careers – Our Roles
- Careers Contact Us
- Careers Trainees FAQs
- Charities
- Construction And Property
- Contact Thank You
- Contact Us
- COOKIE POLICY
- Cooper Parry Book Club
- Cooper Parry Event
- CORPORATE AUDIT
- Corporate Finance
- Corporate Finance – What Our Clients Say
- CORPORATE FINANCE DEALS
- Corporate Finance News & Insights
- Corporate Social Responsibility
- Covid-19 Collaboration-news
- CP Futures
- CP Innovation
- CP INNOVATION – WHAT OUR CLIENTS SAY
- CP INNOVATION FULL PAGE. – DRAFT
- CP Tech 100
- CPERS: COOPER PARRY ENQUIRY RESOLUTION SERVICE
- Creative Tax Reliefs
- CULTURE
- DIVERSITY POLICY
- Early Stage To SME- WHAT OUR CLIENTS SAY
- Ecommerce
- Eddie Latham & PJ Scott – Co-founders, Velocity Commerce
- Education
- EMPLOYMENT TAX
- FAQS
- Financial Reporting
- Find Us
- Flexible ‘Finance Bench’
- Future Events
- Galahad Clark – Founder VivoBarefoot
- GLOBAL TALENT PROGRAMME
- GRADUATES
- HEALTHCARE INSIGHTS
- Helena Hills – Founder & CEO, TrueStart
- HIGH GROWTH LOW DOWN
- Homepage
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- Impact Beyond Business
- Impact Beyond Business New template
- In Their Words
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- INDIRECT TAX
- Inheritance Tax
- Intellectual Property & Patent Box
- INTERNATIONAL TAX
- Investment Calculator UK
- James Hyde – Founder & CEO, James and James
- Jay Richards & Cat Agostinho – Co-Founders, Imagen
- Justin Harling – CEO, CAE Technology Services
- LANDLORD
- LEGAL STUFF
- Let’s Stop Calling It R&D V2 Gated
- Life at cooper parry
- Lounge Underwear Webcast
- MAKING TAX DIGITAL
- Management Information and Reporting
- MANAGING AGENTS
- Manufacturing Tax and Advisory
- Marketing Thank You
- MID MARKET – WHAT OUR CLIENTS SAY
- Mid-Market
- New Hub CP
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- Newsletter Thank You
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- Operational Systems & Technology
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- Meet the Team Retail
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- Outsourcing
- OVERSEAS EXPANSION
- Past Events
- Paul Richardson – Executive Chairman, Gymshark
- Paul Turton – CEO, Pact Coffee
- PENSIONS AUDIT
- Personal Tax
- Personal Tax Compliance
- PLACEMENTS
- Preference Centre
- PRIVACY POLICY
- Private Equity Advisory
- PROPERTY AND LANDLORDS
- R&D Capital Allowances
- R&D Newsletter Thank You
- R&D Tax Credits Questionnaire: Are you eligible?
- Raise investment or debt
- Raising Finance
- Read All About It
- Rebelution 2
- Rebelution 2 Top Tips – Cooper Parry Corporate Finance
- Rebelution 2 Top Tips – Cooper Parry IT
- Rebelution 2 Top Tips – Cooper Parry Wealth
- Rebelution 2 Top Tips – CP Futures
- Rebelution 2 Top Tips – VAT & Brexit
- Research & Development Tax Credits
- Research And Development Tax Credits
- RESIDENCE & DOMICILE ADVICE
- Retail
- Retail Advisory
- Retail Tax
- Rob Law MBE – Founder, Trunki
- Scale Up & High Growth
- SECURITY POLICY
- Service Charge
- Service Test
- SETTING UP BUSINESS IN THE UK
- SHARE INCENTIVES AND REWARD
- Share incentives: Annual Reporting
- SHAREHOLDER TAX ADVICE
- Shaun Doak – CEO, React Group Plc
- Small Business
- SNAPSHOT
- Succession Planning
- Supporting start ups
- SUSTAINABILITY
- Tax – What our clients say
- TAX COMPLIANCE SERVICES
- Tax Services
- TAX SETTLEMENTS AND INVESTIGATIONS
- Tech & High Growth
- Tech & High Growth – What our clients say
- TEN STAGES TO INVESTMENT
- TEN STAGES TO SALE
- Test2
- This Is Us
- Tom and Tina Warner – Co-Founders, Warner’s Distillery
- Transaction Deals
- Transaction Services
- Transaction Services – What Our Clients Say
- TRANSACTION TAX
- TRANSFER PRICING
- Trusts and Estates
- UK support for International groups
- VAT SERVICES
- Virtual Bookkeeping
- Virtual FD
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- Website How To Guide
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WHAT’S HAPPENING?
HMRC are aiming to simplify the rules for unincorporated businesses by applying basis periods so that company profits are calculated in line with the usual tax year (6 April to 5 April each year). This could lead to some individuals facing larger tax bills than expected.
WHEN WILL THIS HAPPEN?
The transition to the new system would begin in 2022/23 and the changes would be fully effective from the 2023/24 tax year.
WHO WILL BE AFFECTED?
Unincorporated businesses such as sole traders (self-employed individuals), partnerships, trusts and estates who use a tax year other than 5 April.
WHAT ARE THE NEW RULES?
Currently, self-employed individuals, sole traders and partnerships are taxed on their accounts ending in the tax year. Going forward, the reform means that they would instead be taxed on profits arising within the same 12 months as the tax year, with the intention of aligning the way self-employed profits are taxed with other forms of income.
The aim is to align the way in which individuals’ income is taxed, reduce the time spent by small businesses filling out their taxes, make the rules fairer, more logical, and easier to understand.
It’s likely that the changes will enable the introduction of Making Tax Digital for non-company businesses from April 2023. This would involve the submission of a quarterly return showing taxable profits to HMRC. The basis period reform will allow these quarterly submissions to align with the correct tax period.
HERE’S AN EXAMPLE:
Under the current rules, a business with a year end of 30 September 2021 would be taxed on these profits in the tax year to 5 April 2022. Under the proposed changes, the business will now be taxed on the profits accumulated from 6 April 2021 to 5 April 2022.
If, as a result of the transition, a business has any profits which are taxed twice in separate tax years, then the ‘overlap profits’ from the earlier year of trade are to be deducted as a relief from the profits of the transitional year.
For businesses where profits in the transition tax year are higher than if calculated under the current basis of assessment, because of the changes to basis periods, the Government proposes an election to spread any ‘excess profits’ in the transition year over up to five years.
WHO ARE THE WINNERS & LOSERS?
Those with a year end date of 31 March or 5 April will see no change as a result of the reform.
Those with different year end dates will need to apportion their profits over a couple of accounting periods to determine their individual tax liability for the year. This could involve including estimates if their accounts are yet to be finalised, thus creating a likely admin burden if the actual results differ from the estimates provided to HMRC.
In the long run, should the process be as simple as HMRC hope, then it could be a positive change.
Check out the below examples for how it might affect you…
WINNERS
Let’s assume a sole trader has a year-end date of 28 February and records profits of £120,000 in year one, and £180,000 in year two. They also have overlap profits brought forward of £10,000.
Usually, they would pay tax on their taxable profits using the current year basis method, so the 12 months to 28 February each year. In this example, £120,000 for the year to 28 February 2023.
However, after the change in rules, for the transitional year, they will be taxable on the profits for the full year to 28 February 2023 and 1/12 of the following year profits to bring them in line with a 5 April 2023 year end. Thus, making the total taxable profits for the year £125,000 after deducting the overlap profits.
LOSERS
Here, we’ll use the same example, with profits of £120,000 in year one, £180,000 in year two and overlap profits of £10,000, but this time with a year end of 30 April.
You would instead be taxable on the full 12 months of taxable profits from year one for the accounts to 30 April 2022, and then 11/12 of profits from year two to bring the accounts up to 5 April 2023 and in line with the tax year going forward.
SO, WHAT CAN YOU DO?
If you have any concerns about the impact of this reform on yourself or your business, then please feel free to get it touch.
Our Private Client and Business Tax teams will be happy to help you with any queries or advice needed on the reform, so you can simplify your tax compliance responsibilities.
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