This will affect all self-employed clients who draw up accounts to a period that does not end on 31 March or 5 April, ie which not coterminous with the tax year. All such businesses will be required to report figures on a tax year basis from 2022/23, ready for MTD to commence from 6 April 2023.
Finance Bill 2022 will legislate to treat accounting periods ending 31 March to 4 April as ending on 5 April, with profits arising after the end of the accounting period as falling into the next tax year. This will apply to both trading and property businesses.
HMRC is not asking businesses to change their accounting periods, just that for tax returns profits will have to be apportioned into the tax year on an “actual” basis. This means the accounts might as well be drawn up to the tax year, otherwise estimates of future income may be required where the accounts are not completed by the time the tax return is submitted.
This change may make sense for MTD, but the transitional year (2022/23) could see up to 23 months of profit being assessed, eg for a 30 April year end. HMRC’s solution is to allow set-off of any existing overlap relief and to spread the extra profits over up to five years.
Another solution may be to change accounting period now in 2021, and this may have advantages as we outlined on 20 May 2021. Alternatively, your client may benefit from incorporating, which will push the MTD mandation date back to at least 2026 and possibly later.
The Government has decided that basis periods will be abolished, the consultation asks how it should be introduced and what other problems will cascade from this change, such as extra costs for businesses. You have until 31 August to respond to the consultation.