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Have your say on basis period reform
HMRC has opened a consultation on basis period reform which asks for views on how best to implement a proposal to simplify the rules under which profits of an unincorporated trading business are allocated to tax years using basis periods.
This consultation 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 aim is to simplify the system before Making Tax Digital for Income Tax becomes mandatory in April 2023.
The reform would mean businesses with a period of account that did not end between 31st March and 5th April would have to make an apportionment to identify the profit or loss arising in a tax year.
The proposals also include treating periods of account ending between 31st March and 5th April as the same for both trading businesses and property businesses, the current treatment applies only for trading businesses and for the first three years of trade only.
There would be transitional rules for the 7% of sole-traders and 33% of partnerships who do not currently draw up their accounts to 31st March or 5th April each year.
The arguments for
- The opening year rules are complex and illogical, particularly for unrepresented taxpayers.
- It is very common for businesses to lose track of their overlap relief or fail to correctly claim for it when entitled to do so.
- The taxation of profits and allowance of losses would become more closely tied to the time that they are earned or generated.
- Quarterly updates under MTD for Income Tax would align with the profits or losses being reported on the end-of-year return.
The arguments against
- Periods of account ending later in the year are unlikely to be finalised before the tax return filing deadline, resulting in provisional submissions and subsequent amendments.
- Businesses without a 31st March or 5th April year end will have to apportion their figures every year and there will be no correlation between a single set of accounts and a tax return as there is today.
- Aligning all accounting dates for sole traders and partnerships would generate a difficult annual peak of work for accountants and other professionals such as stock valuers.
We are fully supportive of any measures designed to simplify the tax system. Unfortunately, these proposals seem to create as many problems as they solve.
In the consultation, HMRC acknowledges that any business with an accounting period ending after 30th September will be unlikely to have the accounts finalised in time to meet the 31st January filing deadline. It cannot be an improvement to the system to have so many additional tax returns filed with provisional figures and subsequently amended.
The consultation also suggests that a business’s choice of accounting date would no longer have any impact on its taxation, and so would gain greater flexibility in drawing up their accounts for the period that suited them commercially. It would seem that the opposite is true. The most popular financial year end other than 5th April is 31st December. Many businesses will now have to consider moving their commercial preference of a calendar year end to one that allows them sufficient time to file their tax return. That could not be less of a commercial decision.
There are a number of possible alternatives within the consultation which HMRC is seeking opinion on but it is perhaps disappointing that simply removing the creation of overlapping periods in the early years is not one of them. It is not the current year basis of taxation that adds complexity, it is the creation of overlap profits through HMRC insisting on a 12 month period of profit being taxed in the first full tax year.
The consultation will run for 6 weeks from 20th July 2021 to 31st August 2021 and we would strongly encourage you to submit a response either directly or via your professional body.
We would welcome your thoughts and opinions in the comments below.