Please note this change will only affect those self-employed clients whose accounting year does not match the tax year.
Source – AAT
Currently, tax returns are based on a set of accounts that end in the tax year on 5 April. This becomes more complex for newly registered businesses who draw a set of accounts based on dates which do not correspond to the tax year (April to April). In these circumstances, tax is paid initially in the first tax year until the end of that tax period and then again, based on the entire accounting year. Profits are effectively taxed twice before being reduced to take into account double taxation.
The complexity of these rules lead to huge numbers of mistakes and errors every tax year, with many businesses being unaware they can claim overlap tax relief and therefore end up paying tax twice.
Under the new system:
- Businesses will be taxed on profits the year they are earned – not on profits of accounts that end in the tax year.
- This removes the need for ‘overlap relief’ because businesses will no longer be taxed twice.
- The new system is intended to be easier to understand and will reduce the time spent filling out tax returns.
In addition, there will be a short transition period from April 2022-2023 to prepare for full implementation from April 2023 onwards.