Unincorporated businesses could be about to see significant changes to the ways in which they are taxed, following the launch of a Government consultation.
The Government 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.