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Basis Period Reform – time to incorporate?

Basis Period Reform – time to incorporate?

Government’s proposed changes

During the summer, the Government published a consultation on reform of the taxation of sole traders and trading partnerships. In summary, the proposed changes would result in taxation for a period being based on the business results for the 6 April to 5 April personal tax year, rather than for the year to the business’ normal accounting period end. The Government have stated that their objective is to simplify the taxation of trading profits and establish a fairer system. They have said these changes will not come into effect before April 2024.

The proposed changes would affect any sole trade or partnership business that doesn’t prepare its accounts to 31 March or 5 April.

The implication of the change is that there will be a transitional year, where more than 12 months of profits will be taxed in the 2023/24 tax year, leading to income tax liabilities becoming due sooner than under the current basis. For example, if the sole trader or partnership has an accounting year end of 30 April, it will result in 23 months of profits being subject to income tax in the 2023/24 tax year.

The draft HMRC guidance proposes that where taxable trading profits are higher in 2023/24 due to the change basis, it is considering an election that will allow the additional profits to be spread over a five-year period.

In addition to the proposed changes to basis periods, Making Tax Digital for Income Tax is due to come into force from 6 April 2024. This will require sole trade and partnership businesses to report taxable profits on a quarterly basis, with a final declaration due by the normal 31 January deadline.

Incorporation?

If the proposed changes are enacted, it may be a catalyst for some businesses to consider the commercial and tax implications of moving to a limited company structure. One of the key factors is that taxable profits in a limited company are subject to lower rates of corporation tax (currently 19%, increasing to 25% for profits above £250,000 from 1 April 2023) with a further income tax charge on dividends only if profits are distributed. This gives flexibility for profits to be retained in the business for future investment. In addition, a company can give rise to other benefits such as access to valuable research and development tax credits and share schemes for the purpose of retention of key employees.

Transferring a trading business to a company is a significant decision which requires careful consideration of all the relevant factors (e.g. limited liability and filing obligations), including the application of tax reliefs for the transfer itself. This structural change may not be appropriate for all businesses, but the implications should be assessed, along with the proposed change to the taxation of sole trader and partnership profits. We have worked extensively with many types of businesses to fully assess whether a company structure would be beneficial and then supported them with the detailed advice and implementation if they choose to proceed.

At Creaseys we work closely with our clients to help them understand their long-term objectives and consequently their ‘Big Picture’. This includes assessment of likely changes to the tax environment, the implications of doing nothing and action that could be taken to mitigate these changes.

If you would like to discuss your particular circumstances, please get in touch with your usual Creaseys contact or call us on 01892 546546 and we will introduce you to one of our specialists in this area.