Freelancers with accounting periods unaligned to tax years must act

It will hardly go down as the most exciting aspect of March which you overlooked as a busy creative freelancer, but Spring Budget 2023 did spotlight the issue of accounting periods that are not aligned to tax years, writes Zeeshan Anwar, head of compliance at Dolan Accountancy.

Based Period Reform: introduction

The government is set to reform what us accountants call the ‘basis period.’ This is due to the Making Tax Digital (MTD) project, which is gradually being introduced by HMRC, partly with the intention of reducing the tax gap (as it will bring the tax system closer to real-time), and partly to make tax processes easier for businesses and individuals.

MTD will eventually require every self-employed professional and company to keep digital records; use software that works with MTD and submit updates to HMRC every quarter.

With all this in mind, the government is addressing those traders whose accounting periods do not align with the tax year.

What to do if my accounting periods do not align with the tax year?

While the majority of sole traders and trading partnerships do run their accounting period alongside the tax year, there are some who do not. And so these are the individuals who will be affected by the reform – even if they are not affected by MTD.

For those who do not draw up their annual accounts to the tax year, their transition to the new rules will come into play in the 2023/24 tax year. And imminently, that tax year begins this Thursday, April 6th – when the 2022/23 tax year ends on April 5th.

Can I keep my accounting period different to the tax year?

However, it is possible for those with a different accounting period to continue using it, should that be helpful for commercial reasons. For example, a freelance wedding photographer may have an accounting year-end of November, to avoid having to do tax administration over their spring-summer period.

But the result of keeping your accounting period unaligned with the tax year, is that the profit (or loss) will need to be apportioned under the tax years in which they arise.

Meet Jan

Let’s take an example.

Jan is a sole trader whose accounting period runs from January 1st to December 31st.

With the basis period reform looming, Jan has decided to make life easier by taking advantage of the transitional year and aligning the accounting period to the tax year.

However, in doing so, this will mean that Jan’s basis period will be longer than 12 months, therefore resulting in a larger tax bill.

In this case, Jan can look to spread payments due to HMRC offering relief during this transition period.

Act sooner rather than later…

If your accounting period does not align with the tax year, then it is most definitely worth starting this process sooner rather than later.

This might even mean having to draw up two sets of accounts to make the transition easier, but this is something your accountant should be able to help you out with.

Finally, it really is worth making the most of the transitional period (commencing this week), as well as the relief offered by HMRC, as from April 6th 2024 – a year on Thursday, this new basis period will become mandatory.