There are likely to be some big tax bills for the self-employed in 2022/2023.
Last month we mentioned that draft legislation has been published to change the basis periods for the assessment of self-employed profits to coincide with the tax year. The proposed new rules provide that from 2023/24 onwards profits or losses will be apportioned to tax years where the period of account does not coincide with the tax year. This is intended to coincide with the start of Making Tax Digital for income tax.
The transitional rules proposed for the previous 2022/23 tax year could result in large tax bills for some sole traders and partners, particularly those with an existing 30th April year end. The profits of year ended 30th April 2021 would be taxed in 2021/22 under the current rules with 2023/24 taxing profits arising between 6th April 2023 and 5th April 2024 under the new rules.
But what about 2022/23?
The profits taxed in 2022/23 would be those for year ended 30th April 2022 plus the period 1st May 2022 to 5th April 2023 – in total 23 months profits!
The good news is that 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 allow the taxpayer to elect to spread the excess profits over the next 5 tax years to smooth out the excessive tax bill.
We can work with you to advise you on how much to set aside to cover these additional tax liabilities. Just get in touch with us and we’ll get started.