Anyone interested in reform of Basis Periods?

HMRC are running a consultation on basis period reform.

Didn't find your answer?

The following link is the consultation if anyone is interested and wishes to respond.

https://www.gov.uk/government/consultations/basis-period-reform/basis-pe...

Replies (29)

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By AndyC555
20th Jul 2021 14:20

HMRC Consultations:

HMRC - we intend to do this, what do you think?

Us - it's unworkable

HMRC - thanks for your input, we're going to do it anyway.

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Replying to AndyC555:
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By David Ex
20th Jul 2021 15:36

AndyC555 wrote:

HMRC Consultations:

HMRC - we intend to do this, what do you think?

Us - it's unworkable

HMRC - thanks for your input, we're going to do it anyway.

Absolutely spot on. They have some brass neck pretending that they are interested in informed views. Another civil service tick box presumably.

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Replying to AndyC555:
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By lionofludesch
20th Jul 2021 18:03

AndyC555 wrote:

HMRC Consultations:

HMRC - we intend to do this, what do you think?

Us - it's unworkable

HMRC - thanks for your input, we're going to do it anyway.

I said something similar last week. It's like an echo.

Don't waste your time. They'll do this. It looks more complicated than what we have already. It's ludicrous for them to claim that the Goverment is committed to making tax more simple and even more ludicrous to suggest that it will reduce errors.

The HMRC service is an utter disgrace.

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By Geoff56
20th Jul 2021 16:44

Financial Secretary to the Treasury, Jesse Norman, said "These complex rules lead to thousands of errors and mistakes..............Simplifying them will allow self-employed people to spend less time doing tax admin......."

Perhaps they could start by scrapping plans for MTD for ITSA.

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Replying to Geoff56:
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By lionofludesch
20th Jul 2021 18:04

Geoff56 wrote:

Perhaps they could start by scrapping plans for MTD for ITSA.

Or the entire IR35 suite of legislation.

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By rmillaree
20th Jul 2021 18:53

wth

Is it just me or is this possibly the most ridiculous thing i have ever seen in my life?

So we are going from one off adjustment at the start to ensure that a reasonable extra sum of tax is paid for the misaligned start period.

To a system where every tax return will now involve

(1) percentages of two years acounts figures being amalgamated unless client used
31/3 year end
and
(2) a system whereby we use accounts dates past year end to submit that years tax returns.
So by their clever maths
ye 31/1/2024 and ye 31/1/2025
so for tax year end 5/4/2024 we use 10/12 of ye 31/1/2024 accounts and 2/12 of ye 31/1/2025 accounts.

errr how are we meant to get ye 31/1/2025 accounts done before 31/1/2025 filing deadline for 2024 tax return.

hopefully its me thats thick late at night and has my maths wrong somewhere!

their cunning plan per linked document.

A business draws up accounts to 30 June every year.

Currently, income tax for 2023 to 2024 would be based on the profits in the business’s accounts for the year ended 30 June 2023. Part of the accounts are outside of the tax year, and part of the tax year is not included in profits taxed.
Our proposed reform would mean the income tax for 2023 to 2024 would be based on:
3/12 of the income for the year ended 30 June 2023, plus 9/12 of the income for the year ended 30 June 24.

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By lionofludesch
20th Jul 2021 19:29

Clearly a crude hammer to persuade everyone to have a March year end.

It's about "We've come up with this crazy MTD idea but we're not clever enough to make it work with the current system so we're making everybody change to something more complicated for them but it's OK because our life will be a LOT easier and that's all that matters."

Did anyone spot what happens to overlap relief? I looked (not hard) but I couldn't see it.

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Replying to lionofludesch:
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By Geoff56
21st Jul 2021 09:15

All remaining overlap relief will be given in the year of transition, with nothing left to carry forward.

If the year of transition produces excessive taxable profits (as HMRC recognises it will, in many cases) there will be an option to spread the excess over five years.

And they call this simplification.

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By darren.austin
20th Jul 2021 19:56

It makes sense when you consider it in conjunction with MTD for Income Tax coming in from 6.4.23. How else are HMRC going to make any sense of the quarterly returns if the accounting period and tax year are not aligned?

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Replying to darren.austin:
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By lionofludesch
20th Jul 2021 20:12

darren.austin wrote:

It makes sense when you consider it in conjunction with MTD for Income Tax coming in from 6.4.23. How else are HMRC going to make any sense of the quarterly returns if the accounting period and tax year are not aligned?

How will that change if we're to time apportion accounts to a mid year date?

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Replying to lionofludesch:
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By darren.austin
20th Jul 2021 20:20

I think it is the first stage of moving everyone to a 5 April year end.

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Replying to darren.austin:
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By rmillaree
20th Jul 2021 20:37

"I think it is the first stage of moving everyone to a 5 April year end."

Yep only hmrc could align everything and then stick with the stupid damn tax months ending on the 5th of the month rather than simply end of year being 31st March and end of each tax month being end of calendar month.

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Replying to rmillaree:
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By darren.austin
20th Jul 2021 20:40

Agreed although the document does say adjustments will not be required if you report to 31 March.

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Replying to darren.austin:
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By rmillaree
21st Jul 2021 08:14

"Agreed although the document does say adjustments will not be required if you report to 31 March"

My irk is all the knock on consequences here really - but it must cause confusion and extra work simply having to detail what alternative options are available - ref knock on consequences for example the mass confusion with "what month are we talking about" when it comes to things like cis returns and the like - only hmrc could have May cis month ending in a date in June and - payslips dated 1st and 31st May being in different tax months technically speaking - also due to the stupid use of a nonsensical random date.

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By lionofludesch
23rd Jul 2021 07:10

rmillaree wrote:

"I think it is the first stage of moving everyone to a 5 April year end."

Yep only hmrc could align everything and then stick with the stupid damn tax months ending on the 5th of the month rather than simply end of year being 31st March and end of each tax month being end of calendar month.

Be careful what you wish for.

You might be grateful for those extra five days once the deadlines start being enforced.

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By DKB-Sheffield
21st Jul 2021 20:49

Hi All

A bit late to the discussion on this one!

So, I get the bit about 1/4 of 2023 and 3/4 of 2024... although, that's actually MORE complex than the current situation (NOT simpler and certainly HARDER for the tax payer to understand).

I also get that HMRC want to collect the tax money in (up to) 11 months earlier.

I further understand that, in allowing a payment period for excess profits above the overlap profit (which in the case of my (very few) non-tax year clients, will be 100% (no overlap profit).

However, what I would be more interested in knowing is... were my clients to change year ends to 31 March (which would be simpler all around) by reporting 2 accounting periods in one return, will the payment plan apply?

This is the single reason my clients are unwilling to change to tax year accounting and is not something that seems to be addressed in the "simpler way to report tax" details!!!

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By lionofludesch
23rd Jul 2021 07:23

DKB-Sheffield wrote:

Hi All

A bit late to the discussion on this one!

So, I get the bit about 1/4 of 2023 and 3/4 of 2024... although, that's actually MORE complex than the current situation (NOT simpler and certainly HARDER for the tax payer to understand).

I also get that HMRC want to collect the tax money in (up to) 11 months earlier.

I further understand that, in allowing a payment period for excess profits above the overlap profit (which in the case of my (very few) non-tax year clients, will be 100% (no overlap profit).

However, what I would be more interested in knowing is... were my clients to change year ends to 31 March (which would be simpler all around) by reporting 2 accounting periods in one return, will the payment plan apply?

This is the single reason my clients are unwilling to change to tax year accounting and is not something that seems to be addressed in the "simpler way to report tax" details!!!

As I read the proposals, there may be a tax planning opportunity here. Folk with a lot of excess profit might welcome the chance to spread that excess over five years rather than stick it all in the final year, where it might well be charged at a higher rate.

Depends on the numbers, obviously. In my experience, there are, broadly, two scenarios.

1. Taxpayer builds up his business then winds it down gradually as he gets closer to retirement. This fits, say, someone in the building trade.

2. Taxpayer continues to build the business which keeps growing.

The fella in 1 won't have much of an overlap problem, whereas the fella in 2 will do. Up to now, he could only change his year end once every five years to spread the recovery of overlap relief.

But let's see what the legislation actually looks like.

Hard to imagine that none of your clients have any overlap relief. I'd see that as extremely unusual.

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Replying to lionofludesch:
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By Tax Dragon
23rd Jul 2021 08:41

I think the draft legislation does cover those points. I didn't notice it cover my loss point below.

Here's a question. Isn't there some principle that the tax system ought to provide folk with certainty? Under the proposed system, there would be people who could not know with certainty what their tax position would be by the time they had to submit their returns and pay the tax. They may end up with interest to pay through no fault of their own. (Contrast the CGT estimate regime where RT and FB agreed on another thread that interest wouldn't arise on reasonable-but-insufficient estimates of 30-day CGT.) Is that consistent with the principle of certainty?

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By Tax Dragon
22nd Jul 2021 06:57

My favourite sentence (of those I've read... which is basically the executive summary and the consultation questions) reads "Draft legislation on the proposal has been drawn up in order to confirm, as far as possible, that it will achieve the intended policy effect with no unintended effects."

I've not looked at the draft legislation. (Why would I? Why would anyone?) Also, I don't often look at consultation documents. Maybe it's no more than a standard sentence.

But, with those caveats made, I wanna ask: what on earth is the logic? How does the ability to write tax basis periods into law - and the ability to write a different basis into law - have anything to say about the consequences of those basis periods on business, let alone confirm, as far as possible, that it has no unintended effects? The words non and sequitur spring readily to mind (or they would if I knew what they meant and how to spell them).

All that said, I'm amazed a tax year basis hasn't been considered before. If it was considered before and was rejected before, that'd be because it's never been the best solution before. If it's seen as the best solution now (to tie in with MTDfIT), it feels like a very lazy solution. The fundamental problems are with MTD, not the current year basis of assessment of business profits.

I'm not against some kind of real time information for the self employed. But this (allegedly enforced consequential change of the way MTD is happening) smells all wrong.

But to formulate a reply that HMRC accepts, it will have to respond to the condoc questions (which read more like a GCSE comprehension exam than questions of actual concern to HMRC, but, again, maybe that's normal in these condocs?)

Anyhow, can we use this forum to collate a set of acceptable responses to see if we can influence this process?

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By Tax Dragon
22nd Jul 2021 07:12

To get the ball rolling, I have a question that I don't immediately see covered (since my post I have had a quick glance through the rest of the document and the draft legislation). I didn't see any overwrite to the rule that a loss is (accompanied by) a Nil profit. The condoc says losses are to be apportioned. I don't think the draft law says anything of the kind.

Example: say a trade has a year end of 5 October. Y/e 2024, profit 10k, 2025 loss 10k, 2026 profit 10k. Talk me through the taxable profits and allowable losses. If the options are any different to what they would have been in 2014, 15 and 16, what is the justification for penalising this business?

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By Tax Dragon
22nd Jul 2021 07:22

What about capital allowances? They'll still come off in determining profits for the accounts period. Which then gets apportioned. As a younger dragon, I was asked by a farmer coming up to his year end whether he should buy a new tractor now or after year end. Off hand I guess it makes far less difference under the new regime. Is that a good thing? (Sorry... I've already wandered away from my proposal to address the condoc questions. I'm just wondering aloud about some of the effects.)

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Replying to Tax Dragon:
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By Tax Dragon
22nd Jul 2021 07:28

Back to the condoc questions... has thought ever been given to taxing unincorporated business in a similar way to companies? Tax has to paid within 9 months of y/e, tax is for the accounting period, tax rates set by reference to tax years? Is this a viable option?

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By lionofludesch
22nd Jul 2021 07:48

Tax Dragon wrote:

Back to the condoc questions... has thought ever been given to taxing unincorporated business in a similar way to companies? Tax has to paid within 9 months of y/e, tax is for the accounting period, tax rates set by reference to tax years? Is this a viable option?

Yes, HMRC mention it in the condoc. The problem would be that individuals have potentially many other sources of income and that might prove to be even more complex.

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By lionofludesch
22nd Jul 2021 07:44

Tax Dragon wrote:

All that said, I'm amazed a tax year basis hasn't been considered before. If it was considered before and was rejected before, that'd be because it's never been the best solution before. If it's seen as the best solution now (to tie in with MTDfIT), it feels like a very lazy solution. The fundamental problems are with MTD, not the current year basis of assessment of business profits

That's very perceptive. The tax year basis has indeed been considered and rejected. It was proposed as part of the Self Assessment suite of legislation thirty years ago. There were two main objections.

First, that it would create bunching in the accountants' workloads. This has largely been allayed by HMRC encouraging DIY accountants, the proliferation of companies and the realisation that not everybody wants their accounts finalising the day after the year end.

The second is that some businesses are genuinely seasonal. These are few and far between but they do exist.

The case is much weaker than it was in 1994.

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By Geoff56
22nd Jul 2021 08:36

If I remember correctly, when the plans for self-assessment were being drawn up, there was also a suggestion that the tax return filing deadline should be 31st December. Coupled with everyone being on a tax year basis, think what fun that would have been. I distinctly recall one MP saying "There are more important things to worry about, than accountants' holidays".

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By lionofludesch
22nd Jul 2021 20:05

You just need to be firm with clients.

Doesn't bother me if they have to pay an extra £100.

Meet the deadlines I set and you'll be grand.

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By Paul D Utherone
23rd Jul 2021 00:38

I curled up in a ball and had a little sob in the corner when I skimmed this today. Utter madness when they cannot even get 30 Day CGT right, but 'it will stop errors'

Apparently they have already asked tax experts in another consultation, and they said it was a good idea.

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By lionofludesch
23rd Jul 2021 05:43

Paul D Utherone wrote:

I curled up in a ball and had a little sob in the corner when I skimmed this today. Utter madness when they cannot even get 30 Day CGT right, but 'it will stop errors'

Apparently they have already asked tax experts in another consultation, and they said it was a good idea.

Thousands of errors every year, apparently. I'd like to see the evidence for these thousands, given that hardly any checking is done and that the vast majority of folk already have a 5th April year end.

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By SteveHa
23rd Jul 2021 09:07

I'm all in favour of abolishing commencement and cessation provisions, and simply start and end tax simply, but introducing additional complexity to align business with the tax year to facilitate HMRC's misguided digitalisation plans that they will be incapable of implementing themselves is abusive.

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