Update - With Making Tax Digital for income tax self assessment not starting until the 2024/2025 tax year, the tax year basis period for accounting will now also begin in the 2024/2025 tax year - with the previous tax year (2023/2024) being the transitional year. An updated article is being written to provide more detail on this.
The government has announced a simplified reporting standard for self assessment of income tax by 2023.
The change, being implemented due to the mandatory Making Tax Digital for Income Tax at the same time (April 2023), will require businesses pay tax on profits that arise in a tax year, rather than profits of accounts that end in the tax year.
Tax returns filed at the moment are based on the accounts ending in the tax year, which runs from April 6th to April 5th. However, nearly ten percent of sole traders and a third of partnerships use a different year end date for their accounts.
An example by HMRC shows that a business drawing up accounts to June 30 each year would normally pay tax in the 2023/2024 tax year based on profits up to their accounting year end of June 30th 2023. However, under the reforms they would pay tax on 3/12 of income from year ending 30 June 2023 and 9/12 of income from year ending 30 June 2024.
Business who currently draw up accounts to dates between March 31st and April 4th will not see a difference as this will still be deemed as the end of the tax year.
Making Tax Digital will require taxpayers to file income reports quarterly throughout the tax year, with the income reported in that quarter directly relating to the tax due for that tax year.