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Hundreds of thousands of self-employed people are “sleepwalking” into giant tax bills due to a little-publicised change to the way businesses report their profits.

Tax experts have warned that many of those affected are unaware they will have to pay a tax bill, calculated in some cases on nearly two years’ income, in early 2025.

The changes will hit about 528,000 sole traders and partners who do not currently draw up their accounts to April 5 or March 31. From April 2024, they will need to report their taxable profits to HM Revenue & Customs up to April 5, the end of the tax year, even if their accounting year ends at a different time.

Meanwhile, in the current 2023-24 “transition” year, the government will tax more than 12 months’ profit, so that those affected can catch up in time for the new regime’s start.

This means people with an April 30 year-end will pay tax on up to 23 months of profit in the transition year.

“It’s a very serious tax grab and people are not aware of it,” said Guy Sterling, a tax partner with Moore Kingston Smith, an accountancy firm. “This is legislation that’s already in place. People will be sleepwalking into large tax bills.”

Emma Rawson, technical officer at the Association of Taxation Technicians, a professional body, said the changes would simplify the tax system overall, but would be a “massive complication” for those affected.

“It’s a hard conversation to tell people: ‘You’ve got extra tax to pay, not because you’ve made more money, but just because HMRC are changing their rules.’ That’s hard, especially in the current environment,” she said.

Individuals affected will be able to mitigate the impact of the larger than expected tax bills through claiming any “overlap relief” they are entitled to. This is relief available for unused overlap profits — income taxed twice when the individual started self-employment.

They will also be able to spread the extra tax due on January 31 2025 across five tax years.

But critics argued this would have a negative impact on some businesses’ cash flow and reduce the amount of working capital partners and sole traders will have for several years.

The change is expected to hit large law firms and accountancy groups, many of which have accounting periods outside March 31 or April 5. Around a third of partnerships are believed to be affected, according to the consultation document on the change.

But the measure will also affect people lower down the income scale, including roughly 7 per cent of sole traders such as construction workers, hairdressers and taxi drivers.

Businesses can choose the date on which they draw up annual accounts. Currently, their tax burden falls at the end of the tax year in which their accounting period stops. Those whose financial year ends on April 30, a date many choose to maximise the period between the time they earn profits and pay tax on them, are therefore able to defer payments for 11 months compared with other taxpayers.

The policy change, which was first unveiled in 2021, aims to create a “simpler, fairer and more transparent set of rules” for the allocation of trading income to tax years, according to HMRC’s policy briefing note.

The date by which the policy was due to start was pushed back a year in the autumn of 2021 — from April 2023 to April 2024 — after a backlash from businesses and tax professionals.

Since that delay there has been little public follow-up by the tax authority. This was problematic, said Sterling at Moore Kingston Smith, as people without tax advisers would probably either have forgotten about the change or not come across the measure.

“If they haven’t kept money back for the tax bill that’s coming they will get a big shock in 2025 if they’re not able to pay all the tax that’s due,” he said.

HMRC said the change would prevent double taxation and ensure profits are taxed once. “This reform will simplify the current complex and confusing basis period rules with a single, consistent basis for all businesses,” it said.

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