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Farming & Rural Business Community

The switch to a fiscal year basis and the impact on farming clients

Author: David Missen

Published: 27 Jul 2021

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How MTD year end changes will impact the industry.

A consultation paper released on 20 July gives further evidence of how the transition to Making Tax Digital (MTD) is likely to affect the self-employed. As many practitioners have suspected, within the introduction of MTD there will be an acceleration of the pay date for those businesses which have a financial year end other than 31 March/5 April. This follows on from the consultation on “timely payment” which came out shortly after the Budget and the referral of fiscal year end changes to the Office for Tax Simplification on 4 June. Since the current paper (which includes draft legislation for FA 2022) must have been finalised well before responses to these two reports have been received, it does make one wonder about why the previous consultations were issued.

Under the current proposals, the profits for 2022/23 will simply be based on the aggregate of all accounting periods ending in that year, plus the profits arising between end of the latest period and 5 April. So, for example, a business with profits of £50,000 in the year ending 30 September 2022 and £60,000 in September 2023 would be taxed on £80,000 being profits in the normal year of £50,000 and 50% of the following year profits for the transitional period. All overlap profits brought forward will be relieved in 2022/23 and in future the business will be taxed on the profits arising within each fiscal year. Whilst there is no compulsion for businesses to make up accounts to 5 April in future, it would clearly be more straightforward to do so since otherwise there is a risk that accounts for the second year might not always be completed in time to incorporate into the SA return, necessitating provisional submissions and subsequent amendments.

HMRC do not say how many taxpayers will be affected by the changes other than that 7% of sole traders and 33% of partnerships currently use non-fiscal year ends. However, the agricultural sector will probably bear a disproportionate impact because the farming partnership is the traditional and most commonly used business structure, and the farming year tends to have a natural break in September-November, with tenancies also normally running to that period. DEFRA statistics identify about 180,000 farming sole traders, partners and directors, so if one assumes that more than 33% of the farming partnerships have non-fiscal year ends and rather more than half of farmers are in partnerships, upwards of 50,000 individuals may be affected.

There are a number of difficulties with the proposed changes (and in some cases opportunities for mitigation). Primarily the establishment of overlap relief will not always be easy. With long standing clients the information should still be available, but given that in most cases it will go back to 1995/6 some research may be necessary unless it is in a permanent file. Where clients have changed accountants, perhaps more than once, the difficulties compound. HMRC should, of course, have details, but there is no indication that these will be offered as a matter of course.  Perhaps we should all now ask for confirmation in respect of all of our clients? 

In a specifically agricultural context, the change will take place at an interesting point in time. On top of the usual volatility arising from weather, yield and pricing, it is happening when direct payments are reducing and before the replacement schemes have become widely available. There may be a planning opportunity from accelerating capital expenditure into the normal 2022/3 basis year (but bearing in mind that Annual Investment Allowance of £1m is likely to end in January 2022 and there is also the issue of balancing charges to consider). The choice of a future year end and the timing of crop sales may also be relevant – a business which shortens the year end to March 2023 might find two years harvests and eighteen months overheads falling into a twelve month period so it might be worth deferring the change in year end until nearer the end of the seven year BPS run off period. The value of the five year transition relief also needs to be assessed as do two and five year averaging, and it is not at this stage clear how these will interact. Taking all these permutations into account, the number of possible outcomes for the 2022/23 tax charge could easily run into double figures!

The basis period consultation makes it clear that the decision has been made, so is really only asking about costs and practicalities. It can be found here.

*The views expressed are the author’s and not ICAEW’s.