Up to 6 MILLION businesses could be affected by the changes which aim to make tax administration “more effective, efficient and easier for taxpayers to get their tax right”.
The move comes from the government to help the transition to the ‘Making Tax Digital’ (MTD) scheme.
When will this take effect?
From 6th April 2023, self-employed businesses and landlords with annual business or property income above £10,000 will be required to follow MTD for income tax (MTD ITSA).
These rules include the abolishment of basis periods. The tax year will align exactly with the reporting of accounting data. Any income/expenses arising after the end of the accounting period will fall into the next year. This will affect both trading and property businesses.
For those business who already draw up accounts to 31 March or 5 April, little will change. Property businesses are already required to report the tax year and by convenience, many draw up accounts at the same time.
Why has this been introduced?
According to gov.uk, avoidable mistakes cost the Exchequer £8.5 billion in 2018 to 2019.
By moving to MTD, the government hope to reduce these errors and reduce the losses made in a year.
MTD aims to be able to handle the challenges the 21st century will have for tax administration. The government hope by removing basis periods, HMRC will become more efficient and make it easier for businesses to calculate tax, with hopes the change will enable a taxpayer to view how much they owe closer to real time.
Are there any negative consequences?
Critics have questioned the purpose of this move for taxpayers nearing retirement, requiring them to learn a new system and possibly invest in equipment which will enable them to follow the rules.
This will also lead to an increase in workload for clients who will have to gather the accounting data in time for the change.
What else will MTD change?
MTD will also change the way unincorporated business submit VAT returns.
Currently, businesses with a taxable turnover above £85,000 (VAT threshold) must keep digital records and submit VAT returns digitally.
Businesses below this threshold will have to follow the rules from April 2022. These businesses, however, can voluntarily follow the rules before this date.