At present, self-employed traders (sole traders and partnerships) are taxed for each tax year on profits for the accounting period ending in that tax year.
Therefore, if a trader’s accounting year end is 31 December, their assessment for 2021-22 will be based on adjusted profits for the year ending 31 December 2021. Which means that actual profits earned from January to March 2022 will not be assessed until the following tax year, 2022-23.
While profits are rising, the existing system means that tax collection on a proportion of profits is delayed by one year. And consequently, if profits are falling, tax payable may be higher than if profits had been assessed on an actual basis.
Based on current information being released by HMRC, it would seem that they now want all self-employed persons to be taxed on actual profits earned in a tax year. If this change is followed through it would prepare traders for the shake-up of income tax assessment to a quarterly, digital upload from April 2024. It would mean that all self-employed year ends would change to 31 March.
Aside from the effects on HMRC’s switch to a Making Tax Digital reporting for income tax purposes, any move to change from assessments being based on accounts’ years ending in a tax year (say the year to 31 December) to results actually made in a tax year (trading years ending 31 March) would involve a process of transition that could have unexpected changes to tax bills in the year the transition is undertaken. Bills for affected taxpayers could increase or decrease.
As HMRC have announced that their MTD for income tax change will start April 2024, we can expect more on a possible change to an actual basis quite soon.