Some businesses could see significant changes to the way in which they are taxed, following the launch of a recent Government consultation.

The basis period reform aims to simplify rules under which sole traders and business partnerships' trading profits are allocated to tax years.

Most of these firms are currently taxed on their annual accounts ending in a tax year, which comes to a close on 5 April each year.

However, as a business can choose any date to prepare their accounts to, some firms have different accounting dates which they have had for years.

What's being proposed is for these businesses to prepare their annual accounts either to 31 March or tax year-end on 5 April.

HMRC proposes the change will take effect before Making Tax Digital for income tax self-assessment (MTD for ITSA) comes in from April 2023.

If the consultation becomes law, the new rules will also fully kick in from April 2023, with 2022/23 being effectively a transitional tax year.

Who could it affect?

The proposal mainly affects unincorporated businesses that do not draw up annual accounts to 31 March or 5 April, and those in early years of trade.

HMRC said in percentile terms, this translates to around 7% of sole traders and 33% of unincorporated business partnerships.

This has the potential to catch out long-standing partnerships, such as law firms, medical practices, dental surgeries, and farming businesses.

Those that have had their current accounting dates for a long time, or who have significantly increased their profits, could face unexpected tax bills.

However, there is likely to be the facility to spread these additional tax charges over a period of five years to help those affected.

Responding to the consultation

Businesses that could be affected by the change have the opportunity to respond to the consultation until 31 August 2021.

Answers to 13 questions need to be answered and sent to before this date.

Make sure to state whether you are a business, individual, or a representative body when providing feedback.

HMRC said all responses will be acknowledged, but it's not possible to provide "substantive replies to individual bodies".

The tax authority has said the draft legislation published alongside the consultation can be updated based on the responses.

Planning ahead

The speed at which this consultation has been rolled out implies there will be no delay to MTD for ITSA to come in from 6 April 2023.

As such, implementing digital accounting software in your business will be essential over the next 18 months or so.

All unincorporated businesses will have the same digital start date of 6 April 2023, and report under MTD to the same quarterly filing deadlines.

These will be on 5 May, 5 August, 5 November and 5 February for quarters ending the month before, plus the annual end-of-period statement deadline of 31 January.

Quarterly updates will have to be filed within a month following the end of each quarterly period, although it's possible to submit up to 10 days before a deadline.

Businesses might also wish to change their VAT stagger group to fit with the calendar quarters for income tax and their accounting periods.

Speak to us about this consultation.