Are you prepared for changes to the income tax basis?

Unincorporated businesses, including sole traders, the self-employed and trading partnerships, will be taxed on profits generated in the 12 months to 5 April each year from 2024/25.

This is a significant change to taxation, which removes the basis period rules and prevents the creation of further overlap relief in a new system known as the ‘tax year basis’.

These changes were meant to be brought in a year earlier but were delayed by the Government in September 2021 to give those businesses affected more time to prepare.

Now the clock is ticking once again on these changes and unincorporated businesses must start preparing now.

The basis period system

Unincorporated businesses are not required by law to produce accounts by a particular date, meaning they can choose any accounting date they like.

Instead, they are currently taxed on profits or losses arising in the accounting period for the 12 months ending with the accounting date which falls in the tax year, known as the ‘current year basis’.

For example, an accounting period ending on 31 December 2022 would be taxed on profits arising in the 2022 calendar year, rather than the 2022/23 tax year.

As a result of this, an unincorporated business’s profit or loss for a tax year is usually the profit or loss for the year up to the accounting date in the tax year, called the ‘basis period’.

However, specific rules do determine the basis period during the early years of trading.

Where the accounting end date is not 5 April or 31 March, which is the equivalent of 5 April for the first three years of trade, the rules can create overlapping basis periods.

This creates a tax charge on profits twice and generates ‘overlap relief’, which is received when the unincorporated business eventually ceases trading.

The new tax year basis

The latest reforms will change the basis period for all unincorporated businesses to the end of the tax year (5 April) from 2024/25, regardless of their current accounting period.

This will create the need for interim arrangements for businesses that do not currently have year-ends falling between 31 March and 5 April each year.

These businesses will potentially face a single, higher tax bill from their profits arising in the year-end falling in the 2023/24 tax year to 5 April 2024.

According to HM Revenue & Customs (HMRC), businesses with a different accounting period end date to the end of the tax year:

  • Will need to apportion profits/losses
  • May need to use provisional figures in their tax returns
  • The statutory rule that deems 31 March to be the 5 April in the first three years of a trade would be extended to apply to all years.

Despite the changeover, reliefs, allowances and tax band thresholds will remain unchanged and will not be pro-rated.

As a result, some taxpayers could move into higher tax bands, while also reducing their ability to benefit from various annual reliefs and allowances during the transition year.

Businesses with year ends not aligned with the tax year will also have a much shorter time between when they generate profits and when tax is due, which could have cash flow implications.

What help is available? 

HMRC is still considering an election to allow businesses with higher profits, due to the change, to spread those additional profits equally over five years. The tax authority will also provide ‘Time to Pay’ arrangements for those needing to spread the costs further.

Businesses can also use all overlap relief accrued when they began trading during the transition year (2023/24) to soften the blow. This would mean that businesses in this position will only have tax to pay on 12 months’ profits.

However, overlap relief dates back to the first year a business traded, when it is likely to have been much less profitable.

Due to the introduction of these rules, new businesses will not generate overlap relief from 2024/25 and there will be no special rules required for starting or ceasing trading or for a change in the accounting period end date.

For the many unincorporated businesses that already have year-ends aligning with the tax year, nothing will change.

However, for those with year-ends that are not synchronised with the tax year, there are several considerations and careful tax planning may be necessary.

Link: Basis period reform

Survey shows taxpayers are still unprepared for Making Tax Digital switchover

A new survey on Making Tax Digital (MTD) shows taxpayers have an alarming lack of readiness and enthusiasm for the changeover and a lack of awareness that MTD for Income Tax begins in less than two years.

HM Revenue & Customs (HMRC) commissioned pollsters Ipsos to undertake new research to explore the preparedness of Income Tax Self-Assessment (ITSA) customers, in the lead-up to the MTD switch in April 2024.

Lack of understanding of a big problem

The latest survey came after earlier research found half of the businesses did not understand their reporting obligations under the extension of Making Tax Digital for VAT, even in January of this year.

Understanding of the specific requirements of Making Tax Digital was lower than general awareness.

In fact, only over half of those surveyed (51 per cent) were aware of MTD and knew of at least one requirement, but alarmingly, 12 per cent provided no correct responses on requirements and nearly four in 10 (37 per cent) could not identify any requirements at all.

The survey had some surprising findings. It found:

  • Around four in 10 said they would find it difficult to start reporting quarterly income tax when the rules come in.
  • Using compatible software was a problem for 35 per cent of respondents.
  • 40 per cent said the switch would be easy and they recognised the benefits of the change.

The lack of experience with MTD software was highlighted as a big problem.

A big majority (86 per cent) of those facing MTD for ITSA had turnover, property income or combined turnover and property income below the VAT threshold, therefore, they had no previous experience of using the software.

How will landlords be affected?

Unincorporated businesses and landlords with annual turnover or gross income above £10,000 will need to follow the rules for MTD for Income Tax Self-Assessment (ITSA) from their next accounting period starting on or after 6 April 2024.

But according to the survey, landlords, particularly those with one or two properties, spent minimal time and effort on their obligations and felt MTD would result in more time and higher costs.

The report also showed that because it is a new system, taxpayers were looking for leniency when submitting their first returns, particularly if previously they had a long history of submitting correct and punctual annual tax returns.

More clarity is needed from HMRC

Andrew Jackson, Vice-Chair of the joint CIOT and ATT digitalisation and agent services committee, said: “We have encouraged HMRC to publish more detailed guidance about the Making Tax Digital process, as there are seemingly more questions than answers at the moment. HMRC must spell out what they are going to do to improve awareness and bring out all the necessary guidance they can urgently.”

Link: Landlords not aware of Making Tax Digital for income tax

The benefits of taking on an apprentice

With the current labour shortage affecting pretty much all areas of the economy, taking on an apprentice could reap rewards for many businesses.

There are many reasons why hiring an apprentice can benefit your business, but for hard-pressed employers, with a limited budget, the financial incentives offered by the Government are a major reason to take the plunge.

Why take on an apprentice?

Benefits include:

  • Plugging the skills gap: It is obvious that if a business has a skills shortage, training an apprentice in that area will reap rewards.
  • Gaining a new perspective on technology: This will allow businesses to equip their workforce with specialist skills and the latest techniques.
  • Enhance reputation as an employer: Giving young or underskilled workers an opportunity in this way can only enhance a firm’s reputation and give something back to the community.
  • Generating a boost in productivity: Training helps staff become more proficient, but an apprentice can also free up time for more senior staff to focus on key areas of their work.

However, perhaps the best part of apprenticeships is the financial assistance available from the Government, which will provide funding to pay for an apprentice’s training and assessment.

Where you get the funding from depends on where you are in the UK. The amount you get also depends on whether you pay the Apprenticeship Levy or not.

Who needs to pay Apprenticeship Levy?

The Apprenticeship Levy is an amount paid at a rate of 0.5 per cent of an employer’s annual pay bill.

As an employer, you have to pay Apprenticeship Levy each month if you have an annual pay bill of more than £3 million or are connected to any companies or charities, for Employment Allowance purposes, that have a combined annual pay bill of more than £3 million.

How is the funding distributed?

For those who do not pay the levy, you will have to pay five per cent towards training fees and you need to agree on a payment schedule with the training provider.

The Government will then pay the other 95 per cent up to a maximum funding band and deliver it directly to the training provider.

What else is available?

You can get £1,000 to support your apprentice in the workplace if they are one of the following:

  • 16 to 18 years old
  • 19 to 25 years old with an education, health and care plan
  • 19 to 25 years old and they used to be in care

The training provider will present the payment over two instalments of £500 each, with the first payment after 90 days and the second after a year on the scheme.

The current National Minimum Wage rate for an apprentice is £4.81 per hour if they are aged:

  • 16 to 19
  • 19 or over and in their first year

If an apprentice is aged 19 or over and has completed their first year, they must be paid the National Minimum Wage or National Living Wage rate relevant to their age.

Link: Apprenticeship Funding