Draft Finance Bill 2022
A very light draft Finance Bill was published on 20 July 2021 for consultation.
The current parliamentary timetable officially provides that the actual Finance Bill will be published following the Autumn Budget on 27 October 2021 and will then be finalised in March 2022. There was very little on the private client side with the main announcements concerning further anti-avoidance measures focused on promoters, including a new power for HMRC to seek freezing orders, and new rules that would enable HMRC to make a UK entity that facilitates the promotion of tax avoidance by offshore promoters, subject to a significant additional penalty.
One measure that is intended as an administrative change to income tax to ease the path to ‘making tax digital’ may, though, have significant administrative and cash flow consequences for sole traders and partnerships (including LLPs such as law and accountancy firms). The changes are intended to come in for 2023–24, with 2022–23 as a transitional tax year. From 2023-24 sole trader businesses and partnerships are to be taxed by reference to profits earned in the tax year, rather than by reference to the profits of their accounting years. If the two periods are different, businesses will need to apportion profits and losses to a tax year, which may be problematic when the accounts for the year in question are not yet finalised, as estimates will need to be used. It is proposed that businesses with accounting periods up to 31 March, be treated as if they were up to the end of the tax year. During the transitional year (2022-23) businesses will be taxed on profits both in respect of the accounting year that ends in 2022-23 and in respect of the rest of that tax year. This has the potential to cause major cash flow problems, for instance for businesses who draw up their accounts to say 30 April and for businesses with higher profits in 2022-23 due to the changes. The government is considering an election to spread the additional profits over a period of up to 5 years.
A consultation was published on how to implement this change on 20 July and closed on 31 August. Sole traders and partnerships that draw up their accounts to any dates other than 31 March – 5 April, will need to consider the potential impact these changes may have on their business in good time, on the assumption that the transitional year will remain as the start of the next tax year. Separately the OTS has launched a consultation on changing the end of the tax year to 31 March, or more drastically 31 December. If that idea were to gain traction then businesses may be facing further administrative disruption.