HMRC is changing how they assess profits for some sole traders and partnerships
How HMRC assesses profits for sole traders and partnerships who use an accounting date between 6 April and 30 March will change from 6 April 2023. This change will not affect companies.
Your accounting date is the last day of the period that you prepare your accounts for. You choose your accounting date when you set up your business and will normally make your accounts up to that date every year. Under the current rules, you are taxed on profits for the accounting date that ends in a given tax year. For example, if your accounting date is 30 November, for the 2022 to 2023 tax year you will be taxed on profits in your 30 November 2022 accounts.
From 6 April 2024, you will be assessed on your profits for each tax year that runs from 6 April to 5 April. This change will affect how you fill in your tax return if you use an accounting date between 6 April and 30 March. The way your profits are assessed if you use an accounting date between 31 March and 5 April will not change.
There will be a transition year from 6 April 2023 to 5 April 2024 to allow any overlap relief that you may be due to be used against your profits for that tax year. You may be due overlap relief from when you started to trade, or if you subsequently changed your accounting date.
How your profits for the 2023 to 2024 tax year will be assessed
The changes will mean the amount of tax that you owe in the 2023 to 2024 tax year may change if you use an accounting date between 6 April and 30 March. You will be assessed to tax on both:
- The 12-month accounting period you have previously been using (the one that ends in 2023/24).
- The rest of the 2023 to 2024 tax year — minus any overlap relief that you may be due — spread over 2022/23 and the next 4 tax years. You can spread these ‘excess’ profits over a shorter period if you wish.
Example (assuming no overlap relief is available):
- Your accounting period is from 1 January to 31 December.
- Your assessable profit is £32,000 from 1 January 2023 to 31 December 2023.
- Your assessable profit is £18,000 from 1 January 2024 to 5 April 2024.
- The £18,000 profit is divided equally and assessed over the next 5 tax years at £3,600 a year (£18,000 divided by 5).
- In the 2023 to 2024 tax year, your total assessable profits will be £35,600 (£32,000 plus £3,600).
Any increased profits from the 2023 to 2024 tax year will be treated in a special way to minimise the impact on benefits and allowances.
How overlap relief can be used
If you set an accounting date between 6 April and 30 March when you started your business, or if you subsequently changed your accounting date, you may have paid tax twice on some of your profits and be entitled to ‘overlap relief’.
Usually, businesses can only use overlap relief to get this tax back when they stop trading or change their accounting date. However, HMRC will allow a business with unused overlap relief to use it in the 6 April 2023 to 5 April 2024 transition year.
In the example above, any overlap relief would be deducted from the £18,000 in step 3, also thereby reducing the profits spread over the subsequent 4 tax years.
Please speak to us about how much overlap relief you may be due in the future.
Changing your accounting period
You do not have to change your accounting period and can continue to use whatever accounting date suits your business.
However, you may want to consider changing your accounting date to 31 March or 5 April. If you do, this will align your accounting period with the end of the tax year, and you will not need to apportion profits on your tax return every year.
HMRC have confirmed that the restrictions on changing your accounting date that are currently in place will be lifted starting from the tax return for 2023 to 2024. If you change your accounting date in your tax return for a year before 2023 to 2024, you will not be able to spread any extra profits that arise in the tax year you made the change in.
Please talk to us because we will be able to clarify this change and discuss your options directly.
Companies are urged to file accounts early and online to avoid penalties
Running your own company can be exciting but also challenging. Directors have lots of responsibilities including keeping company records up-to-date and making sure they’re filed on time.
All limited companies, whether they trade or not, must deliver annual accounts to Companies House (CH) each year. This includes dormant companies.
If we do not file your accounts for you, then you can use Companies House online services which are available 24 hours a day, 7 days a week. There are inbuilt checks to help you avoid mistakes.
It can take as little as 15 minutes from start to finish and you’ll know your accounts have been delivered on time. To file online, you’ll need your company authentication code. If you need to request a new code, you should allow up to 5 days for this to arrive at the company’s registered office.
You should only send paper accounts if your company cannot file online.
Accounts filed on paper need to be manually checked. Companies House can only check them during office opening hours, and they can take over a week to process.
If you need to file your accounts on paper, you should send them to Companies House well before the deadline. This will give you plenty of time to correct your accounts and resend them if they are rejected. You should also consider using a guaranteed next-day delivery and note any industrial disputes or other factors that may make it difficult for a carrier to deliver on time.
Companies House cannot accept postal delays as a reason to appeal a late filing penalty.
Autumn Finance Bill 2022 published
The Autumn Finance Bill 2022 was published last week, legislating for key tax changes announced by the Chancellor in the Autumn Statement.
- The Energy Profits Levy (EPL) is being extended to help fund cost of living support and ensure oil and gas companies pay their fair share of tax. The rate of tax applied to the profits of oil and gas companies is increasing from 25% to 35% and the sunset clause changing to March 2028 rather than December 2025. This measure also reduces the investment allowance from 80% to 29%, except for investment expenditure on upstream decarbonisation, where it will remain at 80%. This broadly maintains the existing cash value of total tax relief for non-decarbonisation investments.
- The threshold for the additional rate of income tax will be lowered from £150,000 to £125,140.
- The Dividend Allowance will be reduced from £2,000 to £1,000 from April 2023 and to £500 from April 2024, and the Capital Gains Tax (CGT) annual exempt amount will be reduced from £12,300 to £6,000 in April 2023, and £3,000 in April 2024.
- Introducing Vehicle Excise Duty (VED) for Electric Vehicles (EVs) from April 2025. This aligns their taxation with that of petrol and diesel vehicles, reflecting their permanent role in the net-zero economy of the future. Alongside this, the government will provide certainty on favourable Company Car Tax rates for electric cars until 2028.
- Income Tax thresholds will remain fixed at their current levels until 2028, an extension of two years.
- The current thresholds for inheritance tax will also remain in place until 2028, an extension of two years.
- Research and development (R&D) tax reliefs will be reformed to make sure taxpayers’ money is spent as effectively as possible, including by reducing error and fraud. From 1 April 2023, the Research and Development Expenditure Credit (RDEC) rate will be increased to 20% from 13%, the SME deduction rate will be reduced to 86% from 130%, and the Small and Medium Enterprise credit rate decreased to 10% from 14.5%.
The main Spring Finance Bill 2023 will follow the Spring Budget in the usual way, for remaining tax measures needed ahead of April 2023. Please talk to us about how the measures affect you and we will be delighted to help.
Scheme helps unemployed people start their own business
More than 1,100 unemployed people facing hidden barriers to entering the labour market have been helped to start their own businesses thanks to a Welsh Government grant scheme, Economy Minister Vaughan Gething has announced.
The Barriers to Start-up Grant for over 25-year-olds is a revenue grant to help economically inactive and unemployed individuals over the age of 25 start up a business in Wales.
It particularly targets individuals facing barriers to starting their own businesses or entering the employment market. It is part of a package of support that includes one-to-one advice and webinars to build confidence in business practices and develop plans for starting a business.
Is your business looking to use more Welsh?
Helo Blod is a fast and friendly Welsh translation and advice service to help you use more Welsh in your business or charity. Helo Blod can translate up to 500 words into Welsh per month for your business, free of charge.