Armagh based accountancy firm, Wylie Ruddell, is warning sole traders and partnerships that they could face bigger than expected tax bills next year if a government proposal to change the date certain businesses report their profits goes ahead.
It is thought that the move would generate billions of pounds for the Treasury years before it would otherwise have received the money and reduce the amount of working capital partners and sole traders will have for up to five years.
Andrew Cornett, Senior Tax Adviser of Wylie Ruddell Chartered Accountants said: “Under current legislation sole traders and partnerships can choose any accounting year end they wish. There are different rules for opening and closing years but in general they are then taxed on a year’s profits in the tax year in which the year-end falls. For example, a year ending 30th September 2021 is assessed in the tax year ending 5th April 2022.
However, under the new proposals, HMRC wants to move to assessing businesses on profits earned on a full tax year basis. Businesses won’t specifically need to change their year-end to 5th April, instead those who stick to their original year ends will start apportioning from two accounting years to fit the tax year in question.”
“As well as the need to prepare accounts much more promptly, this will result in an acceleration of profits being taxed, though there will be a mechanism to allow such liabilities to be spread over a period of five years – but this measure would still have a negative impact on cash flow for some businesses.
We would advise sole traders and partnerships to consult with their accountant at this stage to review their circumstances and consider the options to plan ahead should this draft legislation get passed. Depending on the year-end chosen on commencement, it’s possible that ‘overlap profits’ will exist and this change may provide an opportunity to release these profits. Alternatively, it may be the time to consider transferring your trade to a Limited company, however this option needs to be carefully reviewed before proceeding,” Andrew continued.
“It is clear to see that this change would bring tax into a more real-time, up to date scenario. This change also knits in with the introduction of Making Tax Digital (MTD) for Income Tax from 2023/24 onwards. MTD will require ‘mini-tax returns’ to be submitted electronically to HMRC on a quarterly basis much like your current VAT returns. We have several clients who have taken the step to introduce bookkeeping software to their business and are now ready for MTD and would encourage all businesses across Northern Ireland to make the necessary preparations for the upcoming changes this will bring,” Andrew concluded.
To find out how Wylie Ruddell Chartered Accountants can help your business navigate future tax changes you can email firstname.lastname@example.org or call 028 3752 3227.