Proposed reform to the period of taxation for sole traders and partnerships

HMRC has recently put forward proposals to reform the way in which the tax basis period is calculated for the self-employed and partnerships. They have been seeking views from interested parties in relation to these changes up to the 31st August, but it is highly likely they will be implemented for the 2022/23 tax year with no substantive changes.  

What are the current rules?

At present unincorporated businesses are free to choose whatever accounting year-end they wish. These profits are then taxed according to the tax year in which the accounting year-end falls. For example, a business with a year-end of 30 September 2021 would be taxed on those profits in the tax year running from 6 April 2021 to 5 April 2022 (2021/22), with the tax payable on 31 January 2023.

HMRC believes that the current rules have created a complex system that is difficult to understand. For example, when a business starts or a partner joins a partnership, the ‘opening year rules’ must be applied, this can create double taxation of some profits, called overlap profits.

Any profits which have been taxed twice on the commencement of trade can then be relieved in the year of cessation of the business or upon the partner leaving the partnership. HMRC has identified that these rules are often not correctly applied and records of any overlap profits can often be lost as the period between commencement and cessation of a business can be many years.

HMRC also believes that these rules can give an unfair advantage to larger businesses who often have accounting years that are non-coterminous with the tax year. Smaller businesses will commonly have a 31 March year-end for simplification purposes. If a business has an accounting period ending near the start of the tax year this can give up to 21 months before tax is paid on those profits.

What are the proposed changes?

HMRC proposes to tax all unincorporated businesses on a tax year basis regardless of the accounting year-end. There is no requirement to change the accounting year end of the business, just the way profits are taxed.   

For example, if a business has a 30 September 2023 year-end the taxable profits would be calculated for the 2023/24 tax year by taking six months profits from the 30/9/23 year-end and six months profits from the 30/9/24 year-end. If the 30/9/24 accounts have not been prepared prior to the submission date of the 23/24 tax return it is proposed that provisional figures should be used, and the tax return amended once the final figures are known.

That, however, would just seem to confuse matters, so we envisage that accounting year ends will change to 31 March, unless there is a strong commercial reason for a different year-end.

Will there be a transitional period?

HMRC recognised that during the 2022/23 tax year when the new rules are implemented this could see taxpayers paying a significantly increased amount of tax as more than 12 months of profits may be brought into account. It will be possible to offset any overlap profits but, in many cases, these may be considerably lower than current year profits as they were created when the trade was commencing.

Where taxable profits exceed the current year’s profits excess profits can be spread over five years.

This is demonstrated in the following example:

A sole trader has a year-end of 30 June. The profits to 30 June 2022 are £30,000 and for 30 June 2023 are £60,000. They have overlap profits brought forward of £5,000.

Taxable profits for 2022/23 are:

1 July 2021 – 30 June 2022 30,000

1 July 2022 – 31 March 2023 60,000 x 9/12 45,000

Less: overlap profits (5,000)

Taxable profits 2022/23 70,000

As these profits exceed the current year profits of £30,000 the excess of £40,000 can be spread over five years. The minimum amount per year to be added is £8,000 (40,000/5). An election to spread the profits would therefore see 2022/23 taxable profits of £30,000 + £8,000 = £38,000.

£8,000 would then need adding to the taxable profits for the subsequent four tax years.

Making Tax Digital for Income Tax 

These proposals are seen as a forerunner to future reform and Making Tax Digital (MTD) for income tax which is due to be introduced from 1 April 2023. MTD sees all sole traders, partnerships, and landlords with turnover greater than £10,000 required to keep records digitally and submit quarterly updates to HMRC.

HMRC consider that moving to a tax year basis for taxing profits will reduce the number of submissions taxpayers may need to do. For example, a sole trader who is also a landlord may need to make quarterly submissions for both their business and rental profits. Rental income is currently taxed on a tax year basis, if the business was not taxed on a tax year basis they may not be able to combine the two quarterly submissions, greatly increase the admin burden for the taxpayer.

If you think you will be affected by these proposal please get in touch with us by phone or email.  If you already have a 31st March year end then you will probably be unaffected by these proposals.  See the contact information below:

Phone: 0161 703 8353 and ask for Charles or Kendal

Email:  hello@jeffreyahuddart.co.uk

Upcoming changes to Xero subscription pricing

A reminder about the upcoming changes to Xero subscription pricing.

As a cloud company, Xero continually invests in product development.  Like many businesses, they periodically review their pricing to ensure it reflects the value of the product as it evolves, while allowing them to invest in what’s next.

From 23 September 2021, Xero’s plan prices for UK business plan customers will be as follows:

Since the last price increase in 2019, Xero has invested heavily in business critical areas such as cash flow, getting paid faster, automation and security.  This year they’re focused on providing greater support for cash flow management and insight tools, and they’re working hard to ensure their software keeps us all one step ahead of any upcoming government changes to compliance.

If you have any questions please get in touch on:

Email: hello@jeffreyahuddart.co.uk

Phone:  0161 703 8353

All pricing is in GBP and excludes VAT.

 

Re-opening the office and change to business hours

The coronovirus crisis is a world-changing event and each of us is having to deal with its aftermath and the next normal.

We are aware that from a business operational point of view the future is not what it used to be and no-one is quite certain what normal will look like in the coming months but it does feel like a return to what was a pre-covid norm is much closer.

As we return to a new kind of normal we are opening up our office again where you are free to pop in albeit with regard to current guidance on Covid safety measures and respecting each other’s health and safety.

We have been looking at how we address the new level of client demand (as a result of Covid-19) and as a result we are changing our office operating hours.  From Monday 2nd August 2021 our new office hours will be 9am to 4:30pm Monday to Friday.

The front door is open and as you would expect we will be continuing to adhere to current health and safety guidelines regarding Covid-19 both for clients and staff.

Tom Bathgate
2nd August 2021

Take your business forward with the Government’s Recovery Loan Scheme

Looking for extra funding for your business?

The Government’s Recovery Loans Scheme is designed to improve the terms on offer to businesses, and can help with cash flow, growth, investment and more.

No personal guarantee up to £250,000.  No early settlement fees.

The Recovery Loan Scheme is to help businesses of any size access loans and other kinds of finance so they can recover after the pandemic and transition period.

Up to £10 million is available per business. The actual amount offered and the terms are at the discretion of participating lenders.

The government guarantees 80% of the finance to the lender. As the borrower, you are always 100% liable for the debt.

The scheme is open until 31 December 2021, subject to review.

Loans are available through a network of accredited lenders, listed on the British Business Bank’s website.

Eligibility

You can apply for a loan if your business is trading in the UK

You need to show that your business:

(a) would be viable were it not for the pandemic

(b) has been adversely impacted by the pandemic

(c) is not in collective insolvency proceedings

Business that received support under the earlier COVID-19 guaranteed loan schemes are still eligible to access finance under this scheme if they meet all other eligibility criteria.

What you can get

Firstly, term loans or overdrafts of between £25,001 and £10 million per business

Secondly, invoice or asset finance of between £1,000 and £10 million per business

No personal guarantees will be taken on facilities up to £250,000, and a borrower’s principal private residence cannot be taken as security.

How long the loan is for

The maximum length of the facility depends on the type of finance you apply for and will be:

(a) up to 3 years for overdrafts and invoice finance facilities

(b) up to 6 years for loans and asset finance facilities

How to apply

Find a lender accredited to offer Recovery Loans from the list on the British Business Bank website:

Find a lender

The maximum you can borrow is 25% of your annual turnover, and this cap includes any outstanding debt under the CBILS, CLBILS or RLS schemes.

The Recovery Loan Scheme is managed by the British Business Bank on behalf of, and with the financial backing of, the Secretary of State for Business, Energy & Industrial Strategy. British Business Bank plc is a development bank wholly owned by HM Government. It is not authorised or regulated by the PRA or the FCA. Visit https://www.british-business-bank.co.uk/recovery-loan-scheme.

 

Forms P11D – reporting employee benefits

The forms P11D which report details of benefits and some expenses provided to employees and directors for the year ended 5 April 2021, are due for submission to HMRC by 6 July 2021.

The forms P11D which report details of benefits and some expenses provided to employees and directors for the year ended 5 April 2021, are due for submission to HMRC by 6 July 2021. The process of gathering the necessary information and completing the forms can take some time, so it is important that this process is not left to the last minute.

Employees pay tax on benefits provided as shown on the P11D, generally via a PAYE coding notice adjustment or through the self assessment system. Some employers ‘payroll’ benefits and in this case the benefits do not need to be reported on forms P11D but employers should advise employees of the amount of benefits payrolled.

In addition, regardless of whether the benefits are being reported via P11D or payrolled the employer has to pay Class 1A National Insurance Contributions at 13.8% on the provision of most benefits. The calculation of this liability is detailed on the P11D(b) form. The deadline for payment of the Class 1A NIC is 19th July 2021 (or 22nd for cleared electronic payment).

If you would like any help with the completion of the forms or the calculation of the associated Class 1A NIC please get in touch.

Internet link: HMRC guidance