On 6 April 2024, the current basis period rules applicable to unincorporated businesses will be abolished. From the tax year 2024/25 onwards, owners of trading businesses will report the taxable profits of those businesses on a tax year basis, rather than reporting the taxable results for the accounting period that ends in the tax year. Transitional rules apply for 2023/24.
This change may cause difficulties for businesses that continue to account to a period end that differs to the end of the tax year. The profits for a particular tax year will be taken as a proportion of the profits for the accounting periods that fall partially within the tax year. The results for the last such accounting period may not be known by the deadline for submitting the corresponding tax return. In such cases, business owners would need to estimate those results and use that as the basis for their tax return submissions.
For example, in the tax year 2024/25, a business with a 28 February accounting period date would take 329 days of the results for the period ended 28 February 2025 and 36 days of the results for the period to 28 February 2026. The return for that tax year would be due by 31 January 2026, which is earlier than the accounting period end date of 28 February 2026.
Under existing rules, if estimates are used in a tax return which are then amended when the final results become known, the amendment needs to be made to the tax return as soon as possible. Businesses then have 30 days to pay any additional tax due after the date of the amendment. Late payment penalties are not due unless any additional tax liability is not paid within the 30-day window mentioned above.
HMRC recognises that more businesses will need to include estimated figures in their returns going forward and that this may create a significant administrative burden for some. It is consulting on three alternative options for correcting estimated figures. These options were already set out in the summary of responses to the original consultation on basis period reform. However, HMRC’s technical paper, published on 20 April, sets out more details on the costs and benefits it envisages arising from each of these options.
Further detail on the options being considered are set out below. ICAEW’s Tax Faculty will be in discussion with HMRC concerning these proposals over the next few weeks. If you have any detailed views on these options or any alternative options you would like HMRC to consider, please send them to Richard Jones. In the meantime, ICAEW members and Tax Faculty subscribers can complete our snap poll below. Please sign in to access and complete the poll.
The government would like to assess each potential option against the status quo by comparing the benefits to business with the costs of implementing and maintaining the alternative. It is primarily considering a single main easement but there may be opportunities for easements to be merged. It is also eager to understand how easements will affect particular types of business.
The government is particularly keen to hear what can be done to reduce the administrative burden on partnerships with a large number of partners, as they could suffer a significant administrative burden through the amendment of the results of the partnership as a whole.
It is also worth mentioning that the government is not currently considering whether to introduce mandated methods of estimating provisional figures. At present, businesses are free to choose any method of estimation and HMRC has the right to challenge unreasonable estimates.
Option 1: Amending the estimated figure at the same time as filing the following year’s tax return
This option would essentially extend the time limit for amending estimated figures beyond the current ‘as soon as possible’. It would also give businesses a set deadline to do so, which is essentially the deadline for making any amendments to an income tax self assessment return. This option falls within existing systems and processes for amending a return. However, it would still require an amendment to the return after the end of the tax year. Therefore, it is primarily deferring rather than removing the administrative burden created.
Option 2: Providing some form of extension to the filing deadline for the tax return
The purpose of this option is to remove the requirement to file a return on the basis of estimated figures, which would provide the biggest administration benefit to businesses. However, the nature of the extension needs to be defined, which could be difficult with different businesses having various accounting period end dates. It would require complex changes to primary legislation or ongoing relaxations to penalties. It would also uncouple the deadlines for filing returns and making tax payments.
An alternative option is to bring all businesses onto a corporation tax-style filing system, where the filing date for the tax return is determined by the accounting period end date of the business. However, HMRC has said that this approach could only be considered where the difficulties created by having to use estimated figures outweigh the challenges of introducing such a regime.
Option 3: Reflecting amendments to the results for the current year in the return for the following tax year
This option would remove the administrative burden of having to submit an amended return. However, it could also prove complicated as businesses with estimated figures would always be affected by amendments brought forward from the previous year. It could also create opportunities for tax avoidance or deferral if business owners deliberately underestimate their results, knowing that they can correct them in the following year.
Alternatively, there is an option to ignore any adjustment that falls below a certain de minimis threshold (a so-called ‘safe harbour approach’). However, this contradicts the principle that there is no materiality in tax. It would force HMRC to accept a certain level of error between the figures filed and the actual level of profits. This again could lead to deliberate tax avoidance behaviour.
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