Skip to main content

WARNING - Self Employed Take Note

Who does this affect?

  • Unincorporated businesses (sole-traders, partnerships, and limited liability partnerships) whose accounts year does not end between 31st March and 5th April. 

What is the present position?

  • For a particular tax year, you are normally taxed on the net profit per the accounts which end in that tax year.

Example of the Present Position

  • Tom has been self-employed for several years and draws up accounts to 30th April each year.
  • His accounts to 30th April 2021 show net profit of £30,000. That is taxable in the 2021/22 tax year.

What may change?

  • The Government intend that all self-employed will pay tax and national insurance based upon net profit aligned to the tax year itself and not the accounting year end.

Do I have to move my accounting date?

  • No, you can retain your present accounting year end if you want.
  • However, if the change comes into effect, for tax purposes, you will need to report your self-employed income and expenditure incurred based upon the tax year and not your accounting year end.

When may this change happen?

  • This may come into effect for the 2022/23 tax year (i.e. from 6 April 2022).
  • This would be known as the transitional tax year where you are moving away from the old rules to the new ones.
  • So that the tax hit is not ridiculously high in the 2022/23 tax year, there may be special transitional rules to spread the additional tax burden over 5 tax years.

Why could this happen?

  • Making Tax Digital for Income Tax for the self-employed and property landlords, with a turnover in excess of £10K, starts in April 2023.
  • Under Making Tax Digital, you will be expected to keep digital business records and submit digital reports on a quarterly basis to HM Revenue & Customs regarding your business income and expenditure.
The intention is for all self-employed to be taxed in the same way by April 2023 in time for it to align with the Making Tax Digital quarterly reporting dates.

In what way could this change affect me?

  • If your self-employment profits are rising, you could find yourself with a significant increase in your tax bill, above and beyond what you would normally expect to pay, in January 2024 and also July 2024.
  • You may have ‘overlap relief’ which could help mitigate this tax problem.

What is ‘overlap relief’?

  • This can occur when you have an accounting date ending other than between 31st March and 5th April.
  • It usually arises at the time when you first commence self-employment, resulting in the same profit being taxed twice, once in the first tax year and again in the second tax year of trading.
  • The profit which is taxed twice is then noted as ‘overlap relief’.
  • Overlap relief can be carried forward and, in this case, reduce your net profit, for tax purposes, when looking at your 2022/23 tax year position.
  • The overlap relief is likely to be quite small as profits in the early years of self-employment are usually low.

Here is an example of the potential impact

  • Mary has been self-employed for many years and draws up accounts to 30th April
  • Her profits for the account’s year ended 30th April 2022 are £55,000
  • Her profits for the account’s year ended 30th April 2023 are £66,000
  • Mary’s overlap relief brought forward is £20,000.
  • Mary is single and has no other income.
  • The profits for the 2022/23 tax year are as follows;
a) Accounts year ended 30th April 2022 £55,000 plus

b) Transitional element – 1st May 2022 to 5 April 2023 – £66,000 x 11/12 = £60,500 less

c) Overlap relief (£20,000)

d) Total profits for 2022/23 is £95,500

e) Those profits, which under current rules would not normally be taxed in 2022/23 - (£95,500 - £55,000) = £40,500

f) Under the transitional rules, it is proposed that the excess profit of £40,500 is spread equally over 5 tax years, starting with the 2022/23 tax year - £40,500/5 years = £8,100.

g) The minimum taxable profit in 2022/23 is £55,000 + £8,100 = £63,100
  • Assuming tax and national insurance rates stay as they are, Mary’s 2022/23 tax and national insurance bill moves from £13,190 under the present rules to £16,592 under the proposed new rules. Nearly a 26% increase!!

What should I do?

  • Contact us to see if this proposed change may affect you and to consider whether it is worthwhile, or not, to align your accounts to the tax year.
  • Put together a projection of forthcoming profits with your us to estimate the impact. Monitor that projection going forward.
  • Set aside sufficient funds to meet the January/July 2024 liability.
  • Submit your records to us as soon as possible after 5th April 2023 so that you can obtain an accurate picture of your liability early
  • Look to see whether any planning may mitigate the liability, for example:
a) Bring a family member into the business.

b) Invest in more plant and machinery.

c) Incorporate the business.

d) Put more money into your pension scheme.

  • Check with us that you are properly prepared for Making Tax Digital for Income tax which starts in April 2023.

How can we help?

  • Please do not hesitate to contact us and we can carry out a review for you to see the potential impact if any these changes may bring.
Labels:

Comments

Post a Comment

Popular posts from this blog

Newsletter 08/03/2021

Well I’m sure for many of you today is a big day as children return to school and we begin the slow transition back to normal life. If you require further explanation on any of the topics in todays newsletter then don’t hesitate to get in touch. Our contact details are at the bottom. Todays topics include: Super Deduction 130% Corporate First Year Allowance Electric Switchover – The benefits In my previous newsletter dated 01/03/2021 I shared with you some benefits of electric cars for your business. I want to revisit that as there is still more to say on the matter. The Corporate Super Deduction Allowance (SDA) - 130% What is it? It is a 130% first year allowance deduction for expenditure incurred in purchasing plant & machinery (P & M)  that would normally qualify for main rate writing down allowance of 18%. When can you claim it? You can claim it for expenditure incurred on or after 1st April 2021 up to and including 31st March 2023. When is the expenditure deemed to be ...
2 comments
Read more

Statutory Sick Pay Rebate Scheme (SSPRS)

What is the aim? To support employers facing heightened levels of sickness absence due to Covid-19. What does the SSPRS do? It will refund small and medium-sized employers Covid 19 related statutory sick pay (SSP) costs up to 2 weeks per employee. What is the eligibility criteria? Aimed at UK based employers. They employed fewer than 250 employees as of 30th November 2021. They had a PAYE payroll system as of 30th November 2021. At the time of the claim, they have already paid their employees Covid -19 related SSP. Employers can claim for Covid 19 sickness absences occurring from 21st December 2021 onwards. The 2 week limit is to be reset, so an employer will be able to claim up to 2 weeks per employee, even if they claimed for that employee under the previous SSPRS. How do you claim? Employers will be able to make the claim, through HMRC, from mid-January onwards using the website below: Claim back Statutory Sick Pay paid to your employees due to coronavirus (COVID-19) - GOV.UK (www.g...
2 comments
Read more

More Information- CJRS and SEISS

As we start another week,  I felt it was important for me to share the latest updates with you regarding the Coronavirus Job Retention Scheme and the Self-Employed Income Support Scheme. HMRC Recovery Powers HMRC have put together the draft legislative package to reclaim payments under CJRS and the Self-Employed Income Support Scheme. This is subject to a HMRC consultation which comes to an end on 12th June. Under the draft legislation, HMRC will have the power, by way of a 100% tax charge, to recover payments which were either: Not due Not used to pay wages and PAYE Not used to make pension contributions Penalties will be imposed where there has been deliberate non-compliance. This comes at the same time as HMRC have notified that, to date, they have picked up on nearly 2,000 fraudulent CJRS claims to date. This is, in part, due to ongoing calls to their Fraud hotline number 0800 788887 and also through their online whistle-blower report webpage. Big reminder – 10th June last dat...
Post a Comment
Read more