Reformed ITSA

Reforms to the tax system, which will come into force by 2023, make it easier for small businesses to fill out their returns.

Businesses will be taxed on profits arising in a tax year, rather than profits of accounts ending in the tax year.

It should help them spend less time filing their taxes, especially when a business starts and draws up its accounts to date different to the end of the tax year.

The declaration for self-employed income will be aligned with other forms of income, such as property and investment income.

The ‘current year basis’ system was introduced alongside Income Tax Self-Assessment in the 1990s.
Under the current system, tax returns filed by the self-employed, sole traders and partnerships are based on a business’s set of accounts ending in the tax year (5 April). More complex rules apply when a business starts and draws up its accounts to a date different to the end of the tax year.
Many new businesses are taxed on the same profits twice when they start.
In those cases, taxpayers pay tax for their first tax year on the period to the end of the tax year, and then in subsequent years on the basis of their full accounting year.
This generates “overlap profits” which are carried forward and can be used to claim “overlap relief” when the business ends. It is common for businesses to lose track of their overlap relief, which may date from more than 20 years ago.
The rules on overlap relief are an area of particular complexity, with most eligible businesses not claiming the relief when they should. These businesses may not know they are eligible to use relief, do not know how to calculate relief, or may have lost track of their relief over time.
Many businesses do not trade for more than 3 years, meaning they may never escape the complex early years of trade rules.
The tax year basis

 The ‘tax year basis’ would set the tax year as the basis of assessment, covering profits and losses arising from 6 April to 5 April each tax year.

The tax year basis WOULD NOT mandate a specific accounting date or period of account for businesses.

Businesses would be free to choose any period of account without having to consider the basis period implications, and so would gain greater flexibility in drawing up their accounts for the period that suited them commercially.

The tax year basis could simplify Making Tax Digital for Income Tax for businesses.

Aligning MTD quarterly updates for trading income to the tax year would align quarterly reporting for trade and property income, significantly reducing the number of different reporting dates that taxpayers with both forms of income have to consider for MTD throughout the year.


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