Wayne Thomas, partner at Bates Weston summarises the Chartered Institute of Taxation (CIOT) response to HMRC’s consultation on the proposed basis period reform.  The proposal simplifies the income tax rules for allocating trading profit to tax years rather than accounting years and is intended to be in place before Making Tax Digital for Income Tax self-Assessment (MTD for ITSA) is implemented.

While this may seem obscure, the change to basis period will affect those businesses that do not draw up accounts to 31 March/5April. In other words, those whose financial year end does not coincide with the end of the tax year.

For those businesses affected, the CIOT is asking that the planned changes are deferred by a year to allow businesses, their advisors and agents and HMRC themselves greater time to prepare. This is especially important for affected businesses who wish to change their year end to 31 March or 5 April to deal with the practical issues that arise from a change of year end.

At the same time the CIOT has asked that the mandating of Making Tax Digital for Income Tax Self-Assessment or MTD for ITSA, be pushed back from April 2023, again allowing time for testing and preparation.

The CIOT cites the following among its concerns:

  • Businesses, emerging from the pandemic, are looking for stability and to focus on rebuilding. Administrative change may prove a counterproductive distraction
  • The short timescales for consultation and implementation are likely to result in mistakes and unforeseen outcomes. The proposed transitional year is 2022/23 and many affected businesses may already be several months into their accounting period which ends in the transitional year
  • MTD is being extended in April 2022 and 2023, bringing a new penalty regime and the Office of Tax Simplification (OTS) is reviewing the UK’s tax year end date, considering a move to 31 March or 31 December. Changing the basis period to align with a date that may yet change, seems non sensical.

Whilst the CIOT is supportive of HMRC’s desire to simplify MTD reporting, it lists a further 8 issues that may complicate rather than simplify matters for affected taxpayers. They include the need to apportion profits on an ongoing basis for businesses that choose not to adopt a tax year accounting period end, amending submitted returns, the impact of excess profits in the transition year.

You can view the CIOT’s full response to HMRC’s consultation here.

We will be keeping a close eye on developments.

Read earlier blogs on this topic.