Unincorporated businesses could be about to see significant changes to the ways in which they are taxed, following the launch of a Government consultation and plans to reform the basis period rules in a bid to simplify how unincorporated businesses, such as sole traders and business partnerships, allocate trading profits to tax years for inclusion on their self-assessment returns.

It aims to streamline the system before Making Tax Digital for income tax self-assessment (MTD for ITSA) becomes mandatory from April 2023 for these small businesses and align the way self-employed income is taxed with other forms of income, such as property income.

Such businesses are currently taxed on the profits of their accounting period, whereas under the new proposals they would be taxed on the profits arising in the tax year.

This change would have little impact on a business whose accounting period ends on 31 March or 5 April, but could have considerable impact for ones with a year-end of 30 April.

According to HMRC, 7% of sole traders and 33% of trading business partnerships do not draw up accounts to the tax year or to 31 March, indicating business partnerships are more likely to be affected.

Should the reform get the green light, the changes could kick in from April, with 2022/23 being a transitional year and the reformed rules applying from 2023/24.

It is not yet clear how these changes would fit with any change to move the end of the tax year, which might follow a recent review by the Office of Tax Simplification.

>> Download our Basis period rules Guide


The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.

Lambert Chapman Chartered Accountants

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