Bigger tax bills for the self employed in 2022/23

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The ending of an overlap period for profits for the self-employed could result in bigger tax bills.

A change in the basis periods for the assessment of self-employed profits to coincide with the tax year has been proposed by HMRC. The new rules would apply from 2023/24 onwards.

This is only a consultation right now, but the release of draft legislation suggests change is likely.

Businesses and individuals may wish to speak with their advisors and establish the likely impact on their cash flows of the proposed change. There will be a balancing act between the cash flow implications of paying all your tax in one go, put against the risk of higher profits and tax rates in the future.

The change will mean that profits or losses will be apportioned to tax years where the period of account does not coincide with the tax year. The change is intended to coincide with the start of Making Tax Digital for income tax.

The change will mean that the transitional rules being proposed for the previous 2022/23 tax year could result in larger tax bills for some sole traders and partners, particularly those with an existing 30 April year end.

The profits of year ended 30 April 2021 would be taxed in 2021/22 under the current rules with 2023/24 tax profits arising between 6 April 2023 and 5 April 2024 under the new rules. But what about 2022/23?

HMRC’s proposal means that all self-employed businesses will be taxed on profits earned in a tax year, rather than on the profits of the accounting year ending in that tax year.

The overlap profits are carried forward and set against future profits in certain circumstances, such as leaving the business, the business ceasing or a change in the accounting year.

The profits taxed in 2022/23 would be those for year ended 30 April 2022 plus the period 1 May 2022 to 5 April 2023 – in total 23 months profits!

However, to soften the blow there would be a deduction for 11 months “overlap relief” which typically arose when profits were taxed twice at the start of the business – but those will often be much lower than the extra 11 months being taxed in 2022/23!

The transitional provisions will allow the taxpayer to elect to spread the excess profits over the next 5 tax years to smooth out an excessive tax bill.

The change will mean that any profit or loss for the business is the profit or loss arising in the tax year, regardless of the accounting date. Where a business has a year end other than 31 March – accepted by HMRC as being 5 April for these purposes – profits are to be apportioned between tax years.

It will prevent overlap profits from accumulating in the future and will result in the offset of any unused overlap profits for those in business, when the change is made.

Sole traders, partners in partnerships, members of LLPs and other unincorporated entities with trading income, such as trading trusts and estates and likely to be affected.

VAT – option to tax on land and buildings – notify HMRC within 30 days

Supplies of land and buildings, such leasing or renting out a property, are normally exempt from VAT.

This means that no VAT is payable, but the person making the supply cannot normally recover any of the VAT incurred on property expenses.

However, it is possible to waive the exemption, or in other words inform HMRC that you want to “opt to tax” the land. For the purposes of VAT, the term ‘land’ includes any buildings or structures permanently affixed to it.

Once you have opted to tax, all the supplies you make of your interest in the land or buildings will normally be VAT standard-rated, but by charging VAT on supplies it will normally enable you to recover any VAT expenses you incur in making those supplies.

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