HMRC has issued plans to alter how self-employed people manage and pay their tax costs, due to come into effect in 2023. In essence the proposal replaces the ‘current year basis’ method for establishing taxable profits / allowable losses with a ‘tax year basis’ method instead. This means that self-employed people will be required to pay their tax according to the tax year, not when their own accounting year ends.
In practical terms, the new system will require profits/losses to be estimated, and apportioned throughout the tax year. Of course any inaccurate projections will need to be corrected at a later date.
HMRC are promoting the change as a simplification that will “reduce errors and ensure self-employed businesses get their tax right first time.” They say it will prevent many thousands of errors every year, but in our opinion it is likely to generate at least the same volume of errors as the current method.
The real reason for proposing the change is hinted at within HMRC’s consultation: it will “reduce the number of times those with several sources of income would need to report their income under Making Tax Digital for Income Tax.” So it is actually purely about aligning payment dates for Making Tax Digital for income tax which comes into effect from April 2023.
HMRC’s consultation has not considered the work of the Office of Tax Simplification (OTS) which is currently looking at the possibility of changing the tax year to either 31 March or 31 December! Presumably there is some joined up thinking taking place behind the scenes to ensure that any changes will be carefully coordinated.