CM October 2021

OPINION
SOLE ASYLUM
Tax changes are on the way for sole traders
and partnerships.
LATE on in July (2021) the Government
announced a consultation on
proposals which would change the
way that sole traders and partnerships
are taxed. Whilst in some ways it is
a welcome simplification of often
complex tax rules, it could lead to nasty financial
problems and personal financial failure for those
caught out by the move.
In fact, so great are the changes that Kirsty
Swinburn, a Tax Senior Manager at BHP, considers
that it could lead to an acceleration of tax liabilities
for many businesses.
And Emma Rawson, a technical
officer at the Association of Taxation
Technicians (ATT), agrees: “In the
2022/23 tax year when the change
is introduced, special transitional
rules may result in more profits
being taxable than would normally
be the case,” she explains.
As to whom it will affect, Kirsty
says that the plans are for the
new system to apply to all sole
traders and partnerships but will
mainly affect those businesses who
currently have anything other than
a 31 March or 5 April accounting
year end.
According to an estimate reported by the
Financial Times, some 280,000 sole traders and
250,000 partners could be caught up in the change
based on 2019/20 tax returns.
THE PROPOSALS
Kirsty details that under the current regime,
businesses are taxed based on the profits for
the accounts year ending in the tax year: “So if a
business has a 30 June year end, its 2020/21 tax will
be based on the 30 June 2020 accounts,” she says.
This, she believes, creates complexities,
particularly in the opening years of a business
when profits can be assessed twice, and ‘overlap’
profits created. “This overlap is used when the
business ceases, but the value is often eroded by
time, or lost if a record isn’t kept,” she explains.
Under the Government’s proposals, these
businesses will be taxed on profits earned in a
given tax year, irrespective of their accounting
year end, with an apportionment being applied
if required. As Emma highlights: “For those with
accounting years which do not align with the tax
year, the planned changes are very significant.”
BRINGING THE CHANGE IN
The question for many is when will the change
occur? On this, Kirsty says that as the proposals
AUTHOR – Adam Bernstein
“Those with a
31 December
year end would
have just one
month to
prepare the
accounts before
the figures have
to be submitted
to HMRC.”
presently stand, the ‘tax year basis’ would replace
the ‘current year basis’ entirely from 2023/24.
She adds: “The 2022/23 tax year will be
the transitional tax year and the transitional
adjustments involve the use of the historic overlap
profits.”
This may, depending on profit levels, increase
the tax liability for that year: “Amongst those
who will be most affected,” she says, “are those
who experience really good trading results in the
2022/23 transitional year – so it has the potential to
hit them just as they are bouncing back.”
And it’s likely that seasonal
businesses such as farming,
garden centres or leisure could be
adversely affected.
Emma highlights the problem
with an example: “Let’s assume a
sole trader normally draws up their
accounts to 30 April each year.
In tax year 2022/23 they would,
under the current rules, be taxed
on their profits for the year ending
30 April 2022. However, under the
proposed new rules, they would
instead be taxed on their profits for
the year ending 30 April 2022; and
their profits for the period from 1
May 2022 to 5 April 2023; less any
overlap profits.”
This, she says, effectively results in up to
23 months’ worth of the profits being taxed in
2022/23, rather than the usual 12 months.
And she cites a worked example that HMRC has
given in the consultation. A sole trader has profits
to 30 April 2022 of £55,000, profits to 30 April
2023 of £66,000 and overlap profits of £20,000.
Bypassing the maths, Emma says that under the
new regime: “This results in £8,100 of extra profits
being taxable in 2022/23, and each of the following
four years. For a higher rate taxpayer, that equates
to extra tax payable of £3,240 a year.”
Any additional tax would be payable 31 January
2024.
FIVE-YEAR SPREAD
But in mitigation, Kirsty says that there are
proposals to allow a five-year spread of the
additional tax for those businesses adversely
affected, but this has not yet been finalised:
“This five-year spread is crucial to dampening
the impact in her opinion; without it there will be
some real pain,” she says.
And for those that worry about HMRC wielding
a large stick, for the moment at least, it’s not
being that aggressive towards collecting tax from
individual taxpayers; rather it’s offering easy to
Advancing the credit profession / www.cicm.com / October 2021 / PAGE 28