Business Surgery: Celia Laverick, of Bury St Edmunds accountants Jacobs Allen, explains why simplification of tax rules could be a hassle for businesses

Our country is famous for, amongst other things, having complicated systems – the imperial system for measurement being one that springs immediately to mind, and let’s not get into spelling and grammar – we just wouldn’t be able to stop once we got started.

The UK tax system, like measurement and spelling, developed over hundreds of years and consequently has its quirks – tax years starting on 6th April for instance.

In the search for efficient tax collection systems governments need to try to smooth out these quirks and from 6th April 2023 they are tackling one which affects people running businesses as sole traders.

Those amongst you who are employees or pensioners will be used to receiving income net of tax, employers and pension companies having deducted PAYE at source. This kind of system isn’t appropriate for businesses as they will only pay income tax on any profits they make, rather than on every pound of sales. So, the tax authorities base the tax on profits earned over a period – usually a year ending on a date of their own choosing.

Our current system is that the tax will be based on the profits of the year ending in that tax year. So, if a business produces accounts for the year ended 30 April 2022 the end date falls in the tax year ending 5 April 2023 and so the profit shown in those accounts will be taxed in 2022/23 – even though only one month of the accounts is in that tax year. If a business produces accounts to the 31 December, it will be taxed on the profits for the calendar year 2022 in the tax year 2022/23 and if a business has a March year end, its profits taxed in 2022/23 will be the profits earned in the tax year.

Fairly complicated I think you’ll agree.

Which leads to the change being introduced from April 2024, this is that all sole trade businesses will be taxed on the profits earned in that tax year - April one year through to March the next - whatever their accounting year-end – nice and simple.

The tax year 6 April 2023 – 5 April 2024 is known as a transition year and for this year businesses stand to be taxed on all profits from the date last taxed through to April 2024. So going back to a business with a 30 April year end, in 2023/24 they will pay tax on profits for the period from 1 May 2022 through to 5 April 2024. Twenty-three months profits fall to be taxed in one year which is awkward since businesses generally only make a year’s profits in a year. To resolve this issue, the authorities have introduced a couple of measures to reduce the impact of the change, and, of course, they are not simple!

Depending on how your profits are spread, there might be some opportunities for taking action to reduce your tax bill. If you’re running a business as a sole trader and you don’t have an end of March year end, make sure you speak to your accountant and review your options and understand the impact that the change will have on your taxes. If you are an employee or pensioner, on the other hand, safe in the remit of the PAYE system, now might be the time for a satisfied smile – your system isn’t the one that’s being simplified this time.

Celia Laverick is client manager at Jacobs Allen Chartered Accountants & Chartered Tax Advisers