Agricultural Accountants, Armstrong Watson, is warning that farming businesses could see significant changes to the way they are taxed and may face higher tax bills than expected if a proposed reform is implemented.
The ‘Basis Period Reform’, HMRC claims, will simplify rules under which accounting profits of sole traders and partnerships are allocated to tax years using basis periods, aiming to simplify the system before Making Tax Digital is fully implemented for these small businesses.
If implemented, the new rules will be fully introduced from April 2023, with the tax year starting 6 April 2022 as a transitional year. This is a short timescale, and accountancy bodies are already lobbying the Government for a delay to allow businesses and accountants to get to grips with these changes.
Sole traders and partnerships are currently taxed on their accounts ending in the tax year, and a business can choose any date to prepare accounts to. Some businesses have kept the same accounting date they have had for many years, while others have an accounting date that makes stock counts and other year-end procedures easier. HMRC’s preference is for everybody to prepare accounts to 31 March or 5 April each year, which is not ideal if you are in the middle of lambing or calving on that date.
Armstrong Watson Head of Agriculture, Andrew Robinson, explains,
“The reform would mean businesses 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, such as rents received or investment 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 5th April 2022, but under the proposed changes, 9/12ths of the profits would be taxed in the previous tax year to 5th April 2021. For a business that retains its traditional accounting date, the taxable profit to enter on the tax return will be made up of apportionments from two sets of accounts, making it difficult to see how this can be described as a simplification.”
For a business that decides to move its accounting date to 31 March or 5 April, there is a transitional adjustment in the tax year ending 5 April 2023. Businesses that have had their current accounting date for a long time, or who have significantly increased their profits since commencement, could face an unexpected tax bill, although there is likely to be the facility to spread this additional tax charge over five years, which will be helpful.
HMRC says the new system aims to reduce the time spent by small businesses filing their tax returns, and make the rules fairer, more logical and easier to understand. However, it appears that the driving force behind this change is to assist with the introduction of Making Tax Digital for non-company businesses from April 2023. This will involve the completion of a quarterly submission of data to HMRC.
Andrew Robinson adds,
“Whilst these changes may simplify matters for small businesses not using an accountant, they are likely to increase complexity and accelerate tax bills for some farming businesses.
The proposed start date for transition in April 2022 suggests that HMRC will be pushing ahead with this in order to ensure that quarterly reporting under MTD in April 2023 can be introduced on time as planned.”
The Government launched a six-week consultation on July 20.
For more on the basis period reform consultation visit www.gov.uk/government/consultations/basis-period-reform/basis-period-reform-consultation.