Pushing through proposals to change basis periods ahead of the expansion of Making Tax Digital will cause as many problems as it solves and would be a backwards step for affected businesses, warns ICAEW.
Responding to HMRC’s consultation outlining proposals to align basis periods with the tax year, ICAEW’s Tax Faculty argues that implementing such changes ahead of the introduction of Making Tax Digital for income tax self assessment (MTD ITSA) would not provide any genuine simplification to the UK’s tax system.
Instead, it argues such reforms would be likely to “… increase costs, complexity and uncertainty for those businesses affected and could damage the UK’s attractiveness as a place for the location of international service firms”.
Published as ICAEW REP 77/21, ICAEW’s response reiterates and expands on the concerns raised in a joint letter with other professional bodies to the Financial Secretary to the Treasury on 16 August.
It cautions against rushing through such a major change to the UK’s tax system “without adequate consultation or detailed consideration of the many issues which it raises” and confirms that there is little support from ICAEW members to complete the change ahead of MTD ITSA.
Although the consultation states that 93% of sole traders and 67% of partnerships are already using a tax-year basis for their accounts, ICAEW highlights that those businesses not following the tax year are likely to have very good reasons for doing so. For example, the accounting period of larger businesses with an international presence is likely to be aligned with 31 December which is the “international standard” for tax year end in most other countries.
The response also highlights the considerable difficulties that the proposed change would pose for seasonal businesses (particularly those affected by the timing of Easter), agricultural firms (due to the timing of harvest) and GP practices. Such businesses would face having tax basis periods spanning two accounting periods, resulting in estimating profits for a portion of the tax year in sectors where accurately forecasting profits is extremely difficult.
Overall this would result in less certainty over tax liabilities and, for many businesses, is likely to lead to an increase in compliance costs which would be an unwelcome result of a proposal to simplify the tax system. Furthermore, for those businesses already using the tax year for their accounting period, it will provide no additional simplification.
ICAEW’s view is that the government should not introduce basis period reform on its current timetable. “This pace of change is unnecessary and counterproductive… implementation would be more successful if more time was taken for agents, taxpayers and HMRC to adapt to the changes.”
Instead, it recommends that HMRC takes a more holistic approach to tax system reforms, including waiting for the Office for Tax Simplification’s report on potentially moving the tax year away from the 5 April end date to either 31 March or 31 December.
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.”
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.
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.