Accounting periods that are not aligned to tax years As part of the MTD project, changes have been made to alter the rules under which trading profits made by self-employed individuals and partnerships are allocated to tax years. The changes mainly affect unincorporated businesses that do not draw up annual accounts to 31 March or 5 April. The transition to the new rules will take place in the 2023/24 tax year and the new rules will come into force from 6 April 2024. Affected self-employed individuals and partnerships may retain their existing accounting period but the trade profit or loss that they report to HMRC for a tax year will become the profit or loss arising in the tax year itself, regardless of the chosen accounting date. Broadly, this will require apportionment of accounting profits into the tax years in which they arise. Example A business draws up accounts to 30 June every year. Currently, income tax calculations for 2024/25 would be based on the profits in the business’ accounts for the year ended 30 June 2024. The change will mean that the income tax calculations for 2024/25 will be based on 3/12 of the profits for the year ended 30 June 2024 and 9/12 of the profits for the year ended 30 June 2025. This change will potentially accelerate when business profits are taxed but transitional adjustments in 2023/24 are designed to ease any cashflow impact of the change. Comment An estimated 93% of sole traders and 67% of trading partnerships draw up their accounts to 31 March or 5 April and the proposed changes will not affect them. Those with a different year end might wish to consider changing their accounting year end to simplify compliance with the tax rules.
Simplification measures for small businesses The government is introducing a number of simplification measures to the tax system for small businesses with the aim of encouraging growth by reducing the administrative burden. The announcements include changes to IT systems to allow tax agents to payroll benefits in kind on behalf of their clients and simplifications to the customs import and export processes. Further consultations were launched which may lead to additional reforms including expanding the use of the cash basis. Proposed changes in the consultation include: • increasing the thresholds so that more unincorporated businesses would be eligible • making it the default for eligible businesses • relaxing the restrictions on interest costs and loss reliefs. Investment Zones An Investment Zones programme is being launched to encourage investment in 12 high-potential knowledge- intensive growth clusters across the UK. It is expected that eight sites will be in England and four across Scotland, Wales and Northern Ireland. A five-year tax package will allow businesses located on special tax sites within Investment Zones to benefit from a number of tax reliefs including Stamp Duty Land Tax relief, enhanced capital allowances, structures and buildings allowances and secondary Class 1 NICs relief for eligible employers. Freeports The UK and Scottish governments have jointly announced that Inverness & Cromarty Firth and the Firth of Forth are the two locations for Scotland’s Green Freeports. The two winning bids will be supported by up to £52 million in start-up funding and will benefit from tax reliefs and other incentives through a combination of devolved and reserved powers.
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