New proposals for ‘simplified tax reporting’ for the self-employed will see the often complex ‘current year basis’ rules abolished, aligning the treatment of self-employed trading profits with that for other forms of income. Businesses will be taxed on profits arising in a tax year, rather than on profits of the accounts ending in that year.

The Government is consulting on the detail of the proposed changes, with comments invited until 31 August 2021. For those businesses already adopting a 31 March or 5 April year-end, the impact should be minimal. However, with implementation proposed from 2022/23, others should act now to plan for the changes:

  • Some profits will be taxed earlier, creating cashflow challenges during the transition period as nearly two years of profits could become taxable in a single year. Spreading rules may mitigate the impact.
  • Relief should not be overlooked for ‘overlap’ profits from early years of trade.
  • Businesses with year-ends later in the tax year will may need to submit tax returns including provisional/estimated figures, with amendment once finalised information is available.
  • Consideration should be given to implementing an effective software package for accounting and tax reporting, especially given the also upcoming introduction of Making Tax Digital for Income Tax.
  • Particular complication may arise for partnerships, where joiners/leavers are involved. In certain cases, incorporation may be worth considering.