Detailing the changes to MTD and how they will affect the farming industry.
On 20 July, HMRC announced that, as part of the introduction of Making Tax Digital (MTD) from 2023/24, tax for the self-employed would be assessed on a fiscal year basis with transitional arrangements in 2022/23. This would have affected all sole traders or partnerships which make up their accounts to dates other than 31 March/5 April.
Two months later, on 23 September, there was a change of heart and the Financial Secretary to the Treasury, Lucy Frazer, announced that MTD will now be deferred until 2024/25 and confirmed that if basis period reform goes ahead the changes will not be introduced until the start of MTD, with 2023/24 being the transitional year. MTD for partnerships will come into effect a year later, with “complex” partnerships (those involving corporate partners, LLPs etc.) to follow at later date.
The new penalty regime, which is being introduced alongside MTD, will also now be deferred until 2024/25 for MTD filers, or 2025/26 for other self-assessed taxpayers.
Assuming the fiscal year rules come into effect, in future businesses can continue using non-fiscal year ends but will need to apportion them into fiscal years for tax purposes. Given that the use of non-fiscal year ends is likely to give rise to complications with filing deadlines and provisional submissions (especially for those businesses with accounting years ending late in the fiscal year) it seems probable that many such businesses will change their accounting year if possible.
These changes are likely to be particularly challenging for farming businesses, where a partnership is the most common business structure and autumn is the “natural” year end. HMRC do not have data on how many farms might be affected but they believe 33% of all partnerships will fall within the transitional rules so the proportion of farming partnerships is likely to be much higher – given that DEFRA statistics show some 180,000 individuals in farming businesses it is likely that several tens of thousands will be affected.
During the transitional year taxable profits will be based on all accounting periods ending in 2023/4, plus the profits arising between end of the latest period and 5 April less any overlap relief brought forward. Using the example given in their announcement:
For example, a two partner partnership has profits for the year ended 30 September 2023 of £130,000 and for the year ended 30 September 2024 of £92,000. The profits for the tax year 2023/4 for each 50% partner are as follows:
- Current year basis element – year ended 30 September 2023 – 130,000 / 2 = 65,000
- Plus, transitional element – 1 October 2023 to 5 April 2024 – (92,000 x 6/12) / 2 = 23,000
Total profits for 2023/24 are £88,000 from which each partner can deduct their overlap relief.
Where a partner had profits (after overlap) exceeding what would be the “normal” profit (in this case = £65,000) an election can be made to spread the excess over the next five years. Alternatively (or perhaps additionally), it is possible that conventional 2 or 5 year averaging may also come into play (the current proposals do not specifically refer to averaging at this stage).
Aside from the computational issues, there will in some cases be problems ascertaining the level of overlap to which clients are entitled. This relief will have arisen when a partner joined a business or, in some cases, when the business switched from the old “prior year basis” in 1996/97. Where good permanent files have been maintained, this will not be a problem, but where there have been changes of agent in the meantime, records may have been lost. Apparently HRC do have the requisite details, but are not at this stage suggesting that they will automatically be released to taxpayers or agents. The extended timescale will now allow practitioners to search their archives or, failing that, ask HMRC to confirm the amounts on an individual basis within a longer timescale.
Bearing in mind that farm businesses also have, to some extent, the opportunity to control profits by way of deferring or accelerating profit from cereal sales to either side of a year end, not to mention the benefits of carefully planning capital allowances and/or cyclical maintenance, the extended window of opportunity which has now been given should be helpful. Almost inevitably there will be an increase in the overall tax charge, but at least it will now come with a reasonable period of notice.
ICAEW’s Tax Faculty is developing plans to support all ICAEW members through this period of change. Before the end of the year it will be running a comprehensive programme to include a webinar and updates to ICAEW’s MTD hub before ramping up activity significantly from 2022.
*The views expressed are the author's and not ICAEW's.