Businesses need to be aware of plans by HMRC to reform reporting dates which could impact on upcoming tax liabilities advises Lee Watson, tax partner at Clive Owen LLP.
HMRC plans to ask all businesses such as sole traders, partnerships and LLPs to report taxable profits in line with the end of the tax year (5th April). This could potentially lead to a bigger initial tax liability or a significant administrative burden.
Lee Watson explains the change in more detail:
“At the moment, a business can choose an accounting year end to suit its purposes. This may simply be the anniversary of the business starting, it may be a calendar year end, or it may be a seasonal choice.
“A business that has regularly prepared accounts to 31 December, will report the profits for the year to December 2021 on the 2021/22 Tax Return, as the accounting year end of 31 December 2021 ends between 6 April 2021 and 5 April 2022, which is the tax year 2021/22. Due to the way in which taxable profits are calculated, particularly in the early years of a business, many businesses will automatically choose to report profits in line with the tax year, for simplicity. However, there is no requirement to report in line with the tax year, at the moment.
“From 2023, HMRC is reforming the rules and while there is no plan to force any business to change its accounting year end, the tax reporting will need to be in line with the tax year end.
“However, if a business does not change its actual year end from for example 31 December to 5th April, there will need to be some complex calculations. In 2024/25 it will need to report tax adjusted profits of 9/12ths of the December 2024 profit plus 3/12ths of the December 2025 profits. So, this could prove to be quite challenging, given that the 2024/25 Tax Return would need to be filed by 31 January 2026.
“This is likely to mean that estimates are required which need to be corrected at a later point. In addition, with Making Tax Digital for Income Tax on the horizon, there is likely to be a mountain of administrative burden on taxpayers and their advisers.”
A business may decide to simply change its accounting year end to 5 April to avoid the administrative burden, but this could have implications too, as Lee explains:
“The business could simply decide to extend its December year end to a 5 April year end and begin reporting in line with the end of a tax year, now. However, that would mean that business owners may end up being taxed on 15 months profits (1 January 2021 to 5 April 2022) rather than 12 months (1 January 2021 to 31 December 2021) which brings forward the due date of the tax on the latter three months’ worth of profits.
“In addition, those profits may be taxed at higher rates or impact upon allowances such as child benefit, pensions savings or the personal allowance. However, there may be reliefs available such as the suggested spreading relief, overlap relief and the possibility of making larger pension contributions.”
It is believed that this will impact around five hundred thousand taxpayers, so it will be essential to seek professional advice on these changes to understand how your business and cashflow will be impacted.
Lee added: “It is vitally important that those affected discuss these changes with a tax adviser sooner rather than later as there may be advantages to complying earlier with the rules or advantages to changing the year end to a non-tax year aligned year end and changing it back when the rules come into force. Tax advice specific to individual circumstances is absolutely vital.”