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A review of the proposal.

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Basis period reform

The draft legislation for the next Finance Bill process has been released and includes a proposal to move basis period rules from a current year to a tax year basis.

The transition would take place from 2022/23 and the changes would come into effect from 2023/24, which is when the proposed introduction of Making Tax Digital for income tax self assessment (MTD for ITSA) will also take place. The effect would be that a business's profit or loss for a tax year would be the profit or loss that occurs in the actual tax year itself, regardless of its accounting date.

HMRC consults

In a consultation published alongside draft legislation, HMRC outlines the current rules for basis periods, sets out a specific proposal to simplify them and suggests transitional rules for moving to the new system. The proposal would affect the self-employed, partnerships, trusts and estates with trading income. Unincorporated businesses that do not draw up annual accounts to 31 March or 5 April and those that are in the early years of trade would also be affected.

The consultation seeks views on the detailed policy and questions which businesses are likely to be most affected by the proposal. The consultation also outlines what benefits it is likely to bring and how best to minimise the downsides.

The full consultation can be found at Basis Period Reform - Consultation (www.gov.uk)

No genuine simplification

However, the Tax Faculty at the Institute of Chartered Accountants in England and Wales (ICAEW) argues that implementing such changes ahead of the introduction of MTD for ITSA would ‘not provide any genuine simplification to the UK’s tax system’.

Instead, it says such reforms would be likely to increase costs, complexity and uncertainty for those businesses affected. It could also damage the UK’s attractiveness as a place for the location of international service firms, the ICAEW added.

The ICAEW highlights that those businesses not following the tax year are likely to have very good reasons for doing so, including aligning with 31 December, which is the international standard for tax year end.

The response also stresses the considerable difficulties that the proposed change would pose for seasonal businesses, agricultural firms and GP practices.

Not the time

The ICAEW concludes: ‘As the UK recovers from the pandemic, the one thing businesses need most of all is a period of certainty and stability. This is not the time to make this change and we urge the government to drop the proposal.’

Be prepared

A move in the basis period rules from a current year to a tax year basis could prove to be complex for businesses. Please contact us for advice on these proposals.