Changes to tax for the self-employed
This affects everyone who is self-employed, including partners in partnerships.
At present, if you are self-employed and your accounting date (that is, your business year-end) is not 31 March or 5 April, your profits are taxed in the tax year in which your accounting date falls. Thus, if your accounting date is 30 April, then the profits taxed in the tax year 2020/21 are those of the year ended 30 April 2020 – because 30 April 2020 comes between 6 April 2020 and 5 April 2021.
There are special rules for opening and closing years of business, but we will leave them to one side for now as they are very complicated. Should you have any questions on how they are assessed to tax please get in touch for guidance.
From 2022/23, that will no longer be the case. All self-employed business owners and partners in partnerships will be assessed to tax according to the profits actually earned in the tax year, no matter what your accounting date may be, or whether or not you are a new business.
Please bear in mind that HMRC is not forcing you to change your accounting date. It is simply changing the basis on which profits are taxed.
In practice, this will mean that everyone will have to get his/her business records to us much quicker than previously. Under the current system, if your year-end is 30 April then, for tax purposes, your profits for the year to 30 April 2021 will legally not need to be worked out until January 2023, which is the filing date for the 2021/22 tax return. If the new system were in force now, the accounts would have to be ready by January 2022 – a year earlier.
We will be getting in touch with all our self-employed and partnership clients individually to advise further on planning for the changes.
This note is for general guidance only. No responsibility is accepted for the consequences of any action you may take on reading it. If you have any specific questions please contact us for advice.