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HMRC Proposes Abolition of Basis Periods for Unincorporated Businesses in 2022

Proposals may mean some businesses have large tax bills for 2022/23 as their accounts reporting is adjusted to fit exactly to the tax year from 6 April 2023, in preparation for Making Tax Digital

Draft legislation will be included in Finance Bill 2022 to abolish basis periods for businesses that pay income tax on profits calculated on a current year basis.

From 2022/23 those taxpayers will have to report to HMRC the income and expenses that arise precisely in the tax year – i.e. on an ‘tax year basis’. Losses will be those arising in the tax year.

MTD forces change

With the introduction of MTD for income tax from April 2023, the reporting of accounting data is to be aligned exactly with the tax year.

The law will deem accounting periods ending on dates between 31 March to 4 April as ending on the tax year end of 5 April. Any income/expenses arising after the end of the accounting period will fall into the next tax year. This will apply to both trading and property businesses.  

Businesses which already draw up accounts to either 31 March or 5 April will see no practical difference from 2022/23. However there is a significant minority of self-employed businesses and up to a third of partnerships that use a different accounting date - often 30 April.

Businesses with a 30 April year end will be particularly hit in the transitional year (2022/23) as they will have to report profits for the period from 1 May 2021 to 5 April 2023 in that year. There will be a transitional relief to spread the extra income falling in 2022/23 over five years to 2026/27, but that could push people into higher tax bands for those years. 

To help mitigate the additional income drawn into 2022/23, here a business has over-lap relief arising from when it started trading, that over-lap relief will be off-set against profits in 2022/23.   

Why is this happening?

Without this change to reporting periods taxpayers with several sources of income would need to file MTD reports for differing quarterly periods in the tax year, potentially leading to up to 13 MTD filings required per year, plus VAT returns.

Under the tax-year basis the self-employed taxpayer will file MTD reports for all their sources of income by the same date each quarter, with only a possible deviation for VAT if their VAT returns are not in the stagger one group (March, June, September and December quarter ends).

The estimated tax liabilities, based on those quarterly MTD reports, will also make more sense to the taxpayer, as the income reported in the quarter will be what drives the tax due for the year. 

Please contact Alison Asher if you have any questions.

Alison Asher

About the author

Alison Asher

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