What are the proposed tax changes for the self-employed, sole traders and partnerships?

Unincorporated businesses could see significant changes to the way they are taxed following the launch of a consultation by the Government – which could lead to some facing higher tax bills than expected.

The proposed basis period reform, HMRC claims, will simplify rules under which profits of the self-employed, sole traders, partnerships, trusts and estates are allocated to tax years using basis periods. It aims to simplify the system before Making Tax Digital is implemented for these small businesses.

While the changes don’t take effect until next April, it’s important for those who will be affected to familiarise themselves with the proposed changes and engage with the consultation.

The self-employed, sole traders and partnerships are currently taxed on their accounts ending in the tax year. The reform would mean they would be taxed on profits arising in a tax year and is intended to align the way self-employed profits are taxed with other forms of income.

For example, under the current rules a business with a year end of 30 June 2021 would be taxed on these profits in the tax year to 5^th April 2022. Under the proposed changes 9/12ths of the profits would be taxed in the previous tax year to 5^th April 2021. The change would accelerate tax liabilities in the year of transition and it is likely that HMRC will allow this transitional tax to be spread across five years to ease the burden on cashflow. This change will only affect businesses with a year end which is not 5^th April.

HMRC says the new system aims to reduce the time spent by small businesses filling out their taxes, make the rules fairer, more logical and easier to understand. However, it appears that the driving force behind this change is to enable the introduction of Making Tax Digital for non-company businesses from April 2023. This will involve the completion of a quarterly submission of their taxable profits to HMRC. The basis period reform will allow these quarterly submissions to align with the correct tax period.

The consultation launched on 20^th July and runs until 31^st August 2021 - a period where there are more pressing worries for many including Covid pressures and catching up on missed business. HMRC is seeking views from businesses likely to be affected by the proposal, what benefits it’s likely to bring and how best to minimise the downside.

For more on the basis period reform consultation visit www.gov.uk/government/consultations/basis-period-reform/basis-period-reform-consultation.