A new tax measure included in the small print of last week's Budget could cost self-employed workers more than £1.7 billion, according to the Chartered Institute of Taxation.
The government has announced plans to reform the "basis period" rules which determine how trading income for unincorporated businesses (such as self-employed sole traders and partnerships) is allocated to tax years.
The Chartered Institute of Taxation (CIOT) says this measure will raise an extra £1.715bn for the Exchequer and warns that more than 500,000 self-employed workers could be affected.
The CIOT explains that "the proposal is to change the allocation so that it will be based on the profits or losses arising in the actual tax year, rather than (as now) in accordance with the accounting period ending in the tax year. The new 'tax year basis' will apply from the tax year 2024-25, in anticipation of the start of Making Tax Digital for income tax self-assessment in April 2024, with a transition to the new regime in the tax year 2023/24. The measure will only affect businesses which draw up annual accounts to a date other than 31 March or 5 April."
Labour's shadow Treasury minister Pat McFadden told MPs in the House of Commons: "As well as all the tax rises on income and business the chancellor has announced in the past six months, buried in the Budget red book is a plan for a stealth tax on the self-employed of £1.7bn over the next five years … why are the self-employed being hit with this extra tax rise which the chancellor didn't even mention in his Budget last week?"
Chancellor Rishi Sunak responded by saying that "there were no extra taxes for the self-employed in last week's Budget" and declaring that the increase was simply a result of "a timing difference".
Pete Miller, chair of the CIOT's Owner Managed Business Committee, said: "This change will mean that affected businesses will pay tax on profits for more than a 12-month period in the tax year 2023 to 2024 as they transition into the new 'tax year basis'.
"Businesses that don't already have an accounting period end of either 31 March or 5 April will need to weigh up the costs and benefits of keeping their existing accounting date … The impact assessment published today recognises that there will be one-off costs for businesses including familiarisation with the rules, updating software, and deciding whether to change their accounting date to 31 March or 5 April. However, the estimated cost of this is considered to be negligible, which we think is unrealistic."
Written by Rachel Miller.