Small firms could be hampered by gov tax reform, Armstrong Watson warns

Armstrong Watson has warned that small businesses could see significant changes to the way they are taxed following the launch of a consultation by the government, which may result in some facing “higher than expected” tax bills.

The proposed “Basis Period Reform”, HMRC claims, will aim to simplify rules before Making Tax Digital (MTD) is fully implemented. Under the proposal, accounting profits of sole traders and partnerships are allocated to tax years using basis periods.

If implemented, the new rules will be fully introduced from April 2023, with the tax year starting 6 April 2022 as a transitional year.

The firm has argued that this is a “short timescale”, with accountancy bodies already “lobbying” the government for a delay to allow businesses and accountants to get to grips with these changes.

Richard Andrew, head of accounting, Armstrong Watson, said: “The reform would mean businesses would be taxed on profits arising in a tax year and is intended to align the way self-employed profits are taxed with other forms of income, such as rents received or investment income.

“For a business that retains its traditional accounting date, the taxable profit to enter on the tax return will be made up of apportionments from two sets of accounts, making it difficult to see how this can be described as a simplification.”

He added: “Whilst these changes may simplify matters for small businesses not using an accountant, they are likely to increase complexity and accelerate tax bills for some businesses.”