The implications of the proposed reform to basis period rules, in particular the interaction with MTD for income tax self assessment, are emerging. ICAEW’s Tax Faculty is seeking the views of members before the 31 August closing date for the consultation.
Under the proposed changes to basis period rules, unincorporated businesses would be taxed on the profits arising in each tax year, rather than the profits of an accounting period ending in that tax year.
In isolation, this change would have little ongoing impact on businesses that use an accounting date between 31 March and 5 April, but could be hugely problematic for businesses that use a different accounting date and for their advisers (for more information see “TAFR gets real with consultation on basis period reform”).
Interaction of basis periods and MTD ITSA
The Tax Faculty has highlighted that, if the proposals are implemented, one likely consequence is that the periods for Making Tax Digital for Income Tax (MTD ITSA) quarterly updates would be standardised.
Quarterly updates would be required for periods to 5 April, 5 July, 5 October and 5 January. The rules would allow the quarterly updates to be prepared to 31 March, 30 June, 30 September and 31 December (or an accounting date that falls between 31 March and 5 April etc).
HMRC has informally indicated that the deadlines for the quarterly updates are likely to be 5 August, 5 November, 5 February and 5 May (giving an extra five days for those that account to month ends).
ICAEW is concerned that this requirement may cause bunching of accountants’ workloads and the faculty would welcome feedback on the issues this raises.
What has also emerged is the potential impact on the start date for MTD ITSA. The draft regulations, which have been published in a number of iterations since 2017, provide for a start date falling on the first accounting period starting on or after 6 April in the relevant tax year.
Based on MTD ITSA starting from April 2023 that was expected to mean a start date as follows:
- Accounting date 5 April – start date 6 April 2023.
- Accounting date 30 April – start date 1 May 2023.
- Accounting date 30 June – start date 1 July 2023.
- Accounting date 30 September – start date 1 October 2023.
- Accounting date 31 December – start date 1 January 2024.
- Accounting date 31 March – start date 1 April 2024.
This would have given accountants the opportunity to bring clients into MTD ITSA over a period of a year or more. However, it would appear that one possible consequence of the basis period reform would be that all businesses required to join MTD ITSA would need to do so from April 2023, with the deadline for the first quarterly updates for all businesses and landlords being 5 August 2023. This would bring forward the MTD start date for many businesses and put considerable strain on accountants and on HMRC, in particular on HMRC helplines.
The Tax Faculty emphasises that this outcome is not final. The government has yet to decide whether to proceed with basis period reform in Finance Bill 2021-22 and, if so, from what date.
Similarly, the MTD ITSA regulations are not expected to be laid until later in 2021 and the final ministerial decision on the starting date rules is still pending. However, the indications are that the government intends to proceed with basis period reform in advance of an MTD ITSA start date of April 2023.
ICAEW is very concerned about the capacity for, and sequencing of, this change, especially given that a potential change to the tax year end is also currently under review by the Office of Tax Simplification.
Send your feedback
The consultation on basis periods runs until 31 August and ICAEW’s Tax Faculty requests that members send their comments to anita.monteith@icaew.com by 16 August. Members may find the following list of questions useful when providing feedback
- Would businesses change to use a 31 March or 5 April accounting date? What issues would arise if they did?
- Would the changes be workable for businesses that, for commercial reasons, cannot or would prefer not to make such a change? What types of businesses could not or would not change?
- It is likely that MTD quarterly updates would need to fit within the tax year. This would probably cause bunching of agents’ workload to meet April, July, October and January deadlines (NB the actual deadline probably 5th following month). What impact would this have on firms?
- It is possible that the changes will mean that the start date for MTD ITSA will be April 2023 for all (rather than eg, 1 April 2024 for 31 March accounting dates). How much of a concern is this to your practice?
- Businesses might also wish to change their VAT stagger group to fit with the calendar quarters for income tax, though some might choose to keep them separate to spread their workload. How might businesses and agents respond to this?
- Transitional issues including availability of overlap relief figures and five-year spreading. Would you welcome greater flexibility over when the change is made (currently 2022/23 but might 2021/22 or even 2020/21 be preferred?).
- Any other issues.
Building a better UK tax system
As HMRC embarks on a 10-year review of tax administration, ICAEW examines the potential opportunities and challenges to reforming the UK's tax system to be fit for a digital future.
More support on tax
ICAEW's Tax Faculty provides technical guidance and practical support on tax practice and policy. You can sign up to the Tax Faculty's free enewsletter (TAXwire) which provides weekly updates on developments in tax.
Sign up for TAXwireJoin the Tax FacultyTax Faculty
This guidance is created by the Tax Faculty, recognised internationally as a leading authority and source of expertise on taxation. The Faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.