HMRC changes to sole trader year ends
For decades, sole traders have been able to choose their own accounting year end that doesn’t have to coincide with the default tax year end of 5 April each year.
This was often beneficial, sometimes meaning tax payments were delayed or reduced, or for non financial reasons such as a quieter time of year to do stock-taking etc.
Sadly, HMRC have decided that all sole traders will have to adopt 5 April (or by concession 31 March) as their accounting reference period for self assessment tax returns.
Seasonal businesses, particularly those who are busiest at Easter will be particularly affected as with a 5 April year end, they may have two busy “Easters” in one accounting year and none at all in another, because Easter dates can vary before and after 5 April from one year to another. Historically, businesses that are particularly busy at Easter would usually choose an accounting reference year end date of 30 April or 28 February (or any other date before or after) to avoid having two Easters in one year and none in another. This aspect in particular may cause problems where profit levels are close to tax thresholds etc and may impact of high impact child benefit charges if it causes income over £50k in one year or loss of childcare and personal allowance if it causes income of over £100k.
HMRC have, however, announced various concessions and transitional reliefs which should ease the financial burden of the changes for the next couple of years, which is helpful, especially as the change will generally increase chargeable profits in 2024 or 2025, as the practical effect, is to bring more than one years’ of profits chargeable for tax in one year, mitigated to some extent by overlap relief often at a much lower level from many years ago when the business first started.