Half a million UK partners and individual entrepreneurs will face bigger tax bills in 2022
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More than half a million independent contractors and partners in law firms and accounting groups face bigger tax bills than expected next year, following a UK government proposal to change the date on which some companies report their profits.
Experts said the move would generate billions of pounds for the treasury years before it otherwise received the money and reduce the amount of working capital partners and independent traders will have for up to five years. .
A consultation and a bill published last month revealed plans to change the 12-month period used by partners and individual traders to calculate profits, to bring everyone in line with March 31 or the end of the fiscal year on April 5 .
The change would mean that tax debts, which companies and their partners are currently able to defer by having a later date for their fiscal year end, will be brought forward.
The measure is expected to affect around 250,000 partners and 280,000 independent traders, based on tax returns for 2019/20.
Anita Monteith, senior policy adviser at the Institute of Chartered Accountants in England and Wales, said she would not be surprised if the measure generated “billions”.
“Because these major partnerships bring in millions of euros. . . you can get a nice chunk of cash that will help pay off some of the huge national debt, ”she said.
Currently, companies can choose the date on which they prepare their annual accounts. Their tax burden, as well as that of their partners, falls at the end of the fiscal year in which their accounting period ends.
Partners whose fiscal year ends on April 30, a date many choose to maximize the time period between when they make a profit and when they pay taxes, can defer payments by 11 months compared to other taxpayers. .
But from 2023, the government has proposed that companies and their partners be required to align their taxable profits with the rest of the country, even if they prepare their accounts on a different date.
There will be a transition year starting in April 2022 for companies that are not currently using any of these dates. Meanwhile, affected companies will have to pay taxes on profits over a year – in the worst case 23 months – to be ready for the new system to start in April 2023.
Guy Sterling, a tax partner of Moore Kingston Smith, an accounting firm, said he expected the measure to generate at least £ 1 billion from the largest accounting and legal firms.
“In addition to complicating profit reporting, it will speed up tax payments for many business partnerships and affect the cash flow of an industry considered an easy target by HM Revenue & Customs,” he said. added.
The government has not released the impact of the proposal on the public purse, but plans to do so after the consultation ends on August 31. He currently receives deferred payments when people leave their partnership, which is often when they retire or when independent traders close their businesses.
The government has suggested that taxpayers could spread the payment over five years, but some say the measure would still hurt cash flow for partners and professional service firms.
Giles Murphy, head of business practices at financial advisers Smith & Williamson, said if the ability to defer tax was gone, “businesses will have a hole in their cash reserves and that could be quite significant.”
Philip Harle, chairman of the City of London Law Society’s income committee, said: “I think it will be a real nightmare for large law firms.”
A partner at a Big Four accounting firm accused the Treasury of not consulting widely enough and considering the different needs of a range of businesses. Excluding partnerships from the measure should be something the Treasury has considered, the person said.
However, the government said it had informally consulted with large and small businesses on the changes before launching the consultation.
The change is partly made to simplify the tax system before digital filing and reporting for income tax begins in April 2023.
Those affected will benefit from removing a quirk from the current rules, which effectively requires new associates in some companies to pay two years of tax when promoted and requires them to wait until retirement for the overpayment. be reimbursed.
The Treasury said: “Simplifying the base period rules will allow the self-employed to spend less time dealing with tax administration and will also help reduce errors and errors in returns.”