As usual, there were many items within yesterday's Budget that either didn't form part of Rishi's announcements or at least didn't grab the headlines ... and one of these is set out at https://www.gov.uk/government/publications/basis-period-reform/basis-per...
In short, the ‘current year basis’ is wholly replaced by a ‘tax year basis’ with effect from the tax year 2024 to 2025. So that a business’s profit or loss for a tax year is the profit or loss arising in the tax year itself, regardless of its accounting date. This removes the basis period rules and prevents the creation of further overlap relief. On transition to the tax year basis in the tax year 2023 to 24, all businesses’ basis periods will be aligned to the tax year and all outstanding overlap relief given.
We all knew that this had been proposed and many will have noticed the draft legislation published on 20th July ... but AFAIK this is the first time we've been told that it WILL be happening. The legislation will be introduced in Finance Bill 2021-22 ... to amend Chapter 15 of Part 2 of ITTOIA and to introduce special rules for the transition year in 2023 to 2024.
Although MTD isn't specifically mentioned, the objectives/justifications from HMRC are as interesting as usual:
* All other forms of income are taxed on a tax year basis for individuals, including property income, interest and dividends. This policy aligns trading income with these other forms of income.
* For businesses that do not draw up their accounts to 31 March or 5 April, introducing the tax year basis for trading income will bring the payment of tax closer to the time that profits are earned. This will make it easier for businesses to save for their tax obligations, improve compliance, and reduce tax debt write-off.
* Bringing the payment of tax closer to the time profits are earned will also make the Income Tax system more responsive, giving effect to changes in rates and rules sooner for self-employed people and allowing any future support to be better targeted.
Ah well, it's good to see that they haven't lost their sense of humour. One of my favourites being: "Businesses that are expected to be affected by the measure include farming, other seasonal businesses and large partnerships. Data is not available to determine any particular equalities impacts for those in groups sharing protected characteristics, but it is not anticipated that there will be any." So if you're expected to be affected but HMRC don't have the data to quantify that, then it won't have any impact!
Good luck with explaining the actual impact to individual clients, whilst introducing them to the joys of MTD and your revised fee charges.
Replies (46)
Please login or register to join the discussion.
No - at least highly unlikely from HMRC's performance before the Lords committee linked below (helpful if you've had your blood pressure pills but are suffering insomnia)
HMRC
"we really do not care what the consequences are for the taxpayers, and cannot be bothered to find out, but the windfall tax receipts suit us fine"
When I was a lad, pretty much every farm had a 5th April year end, as a legacy of the old Schedule B days.
Not here and now. Here in deepest darkest Wales we have a large farming client base, and off the top of my head, I can't think of one with a 31/3 - 5/4 Y/E.
Not here and now. Here in deepest darkest Wales we have a large farming client base, and off the top of my head, I can't think of one with a 31/3 - 5/4 Y/E.
No. I doubt if anyone trading today was ever taxed under Schedule B.
I shall be sure to tell all my negatively affected clients that HMRC have advised they are not negatively affected.
Likewise I will be telling all my MTD clients facing considerable additional time and costs that they are benefiting from quarterly filing and digital tools as HMRC said it was true.
Or, bluntly, the Legislature & State are there to serve HMRC not the other way round!
If HMRC were a soccer team, we'd still be awaiting rule changes that ensured they actually won that Cup Final in 1936.
There's a note of some changes to how to excess in the transitional year might be handled, but still just a little too early for me to get retired before the brown stuff hits the fan.
HMRC explaining why they want the changes - Finance Bill Sub-Committee - Thursday 28 October 2021
https://parliamentlive.tv/event/index/9f844ae3-3d60-4fa6-80bb-5516bfce02ab
In less than 5 minutes
Per HMRC
small business owners just do not understand and their accountants just cannot explain it to them
Many businesses do not claim overlap relief
They live in a different world to me
In less than 5 minutes
Per HMRC
small business owners just do not understand and their accountants just cannot explain it to them
Many businesses do not claim overlap reliefThey live in a different world to me
Never had a client who didn't know fine well about overlap relief. Though I did need to explain it first.
Yup that's what I got from it as well. Variously:
- we can't preempt the FB details next week
- people don't understand
- no it doesn't increase the tax take and is neutral in time (true but it certainly accelerates tax take, and I did like the rather waspish "well we all die in time" response)
- No honestly this wasn't an afterthought in the run up to MTD we've been thinking about it for ages (with finger firmly crossed no doubt)
- We have details of Overlap and will provide it (but only if at some time in the past the taxpayer has recorded it on an SA return so we have a record)
- blah blah BS & obfuscate
Thanks ... for ruining my prospective sleep tonight!
I've watched and (although it's not my style to make personal attacks/judgements) I've NEVER been so unimpressed by a witness as I was by Bridget Micklem ... she makes Boris look honourable and with a firm grasp of the details.
She never actually answered extremely clear questions - responding with a nervous giggle by parroting pre-written word-gloop that actually was devoid of all meaning!
Would you buy a used car from her ?
A few points struck me.
"Many thousands of Overlap Relief errors a year"
Given that overlap is only relevant on commencement, cessation or change of accounting date, that seems a lot to me.
"A complex area of law"
No it isn't. It's very straightforward. Though, given the number of Overlap Relief queries on this forum, maybe I'm wrong about that.
"We have tried to explain......"
How many times did she say that ?
"The best way to tell taxpayers what their Overlap Relief is"
How about sticking it on their PTA ?
"Taxpayers are not required to enter Overlap Relief on their returns"
They certainly used to be.
"Taxpayers are better off by claiming Overlap Relief"
Hang on - are they not saving a bit of tax every year when profits are rising ? How can they be better off by claiming Overlap Relief ? And, if they are, why are we offering a transitional Relief for a tax saving ?
The paucity of talent at HMRC senior management level is staggering. They just do not understand the issues.
Jaysus - 20 years of moving the IR35 goalposts around the field of play and HMRC reckon that the place to start with tax code simplification is Overlap Relief.
It does sound as if there will be some (possibly impenetrable) rules introduced in the updated legislation to maybe take the transitional (spread) amount out of consideration for things like HICBC, and maybe personal allowance taper & the like.
Waiting on the new draft with bated breath to update my large partnership high level model for the transition.
Much to my surprise HMRC did have on record a very old Overlap Relief amount ;when I didn’t have it on record.I still cannot quite believe it;for some clients we are talking about what, a situation that arose twenty odd years ago.
Much to my surprise HMRC did have on record a very old Overlap Relief amount ;when I didn’t have it on record.I still cannot quite believe it;for some clients we are talking about what, a situation that arose twenty odd years ago.
I've never had a problem getting this. Nor am I surprised. HMRC need to know this.
Much to my surprise HMRC did have on record a very old Overlap Relief amount ;when I didn’t have it on record.I still cannot quite believe it;for some clients we are talking about what, a situation that arose twenty odd years ago.
I've never had a problem getting this. Nor am I surprised. HMRC need to know this.
Quite.
The surprise was the refusal by the HMRC rep in the Finance Bill Sub-Committee video link above (despite being asked several times) to confirm that they hold the data ... going as far as to claim that it had never been a 'required' item of data to be reported to HMRC, so their records were 'incomplete'!
Whether the box was filled in or not, it's easy to calculate Overlap Relief for a new business from the two years' returns.
1. Add together the profits assessed in the two years
2. Take away the profits shown in the accounts
3. Bob's your uncle.
Slightly more difficult for changes of date and Transitional Relief but still possible.
Quite.
The surprise was the refusal by the HMRC rep in the Finance Bill Sub-Committee video link above (despite being asked several times) to confirm that they hold the data ... going as far as to claim that it had never been a 'required' item of data to be reported to HMRC, so their records were 'incomplete'!
The way that I understood his reply was:
"If the taxpayer has ever entered details of overlap relief carried in their SA return, then we shall have the information and be able to provide it, but we don't require it in the SA return and if they never have we don't have it and can't help"
So if someone (an agent in the past maybe) had entered details, but then the taxpayer believed the advertising lie that "tax isn't taxing and anyone can do it for themselves" and did so, but didn't enter any record of Overlap, then the details will be somewhere in HMRC systems, but otherwise you can whistle for it.
Hugo Fair wrote:
Quite.
The surprise was the refusal by the HMRC rep in the Finance Bill Sub-Committee video link above (despite being asked several times) to confirm that they hold the data ... going as far as to claim that it had never been a 'required' item of data to be reported to HMRC, so their records were 'incomplete'!The way that I understood his reply was:
"If the taxpayer has ever entered details of overlap relief carried in their SA return, then we shall have the information and be able to provide it, but we don't require it in the SA return and if they never have we don't have it and can't help"
Or he might have said "..... if they never have, we don't have it and we won't be able to check it if they put any old nonsense on the return so claim away."
In my experience, HMRC don't have records of Overlap Relief if it has not been repeatedly entered on Returns (as it should have been)
Some years ago I think they had a 'clear out' of old data !
In my experience, HMRC don't have records of Overlap Relief if it has not been repeatedly entered on Returns (as it should have been)
Some years ago I think they had a 'clear out' of old data !
Surely that'll be because you famously don't have any clients with Overlap Relief.
I have inherited such cases and dealt with them straight away !
How did you deal with the Overlap Relief if you didn't know what it was ?
As the others have said, we had to feel our way. It was quite a while ago, and my memory on the details is a little hazy.
I do remember having some screen shots from HMRC on a couple of occasions.
Report on the PB's evidence to the Lords Committee - https://www.tax.org.uk/lords-basis-period-hearing-too-many-unanswered-qu...
Here we go again
All you lot moaning about the consequences of the Overlap Relief Time Bomb that you have had approximately 25 years to face up to and deal with
When I have raised it here before over the years, it was pooh-poohed, but it has always affected those who were forced to end their self employment (and the estates of those who died). Just in a piecemeal fashion.
Let's hope the Newspaper that picks up on this blames the accountants, not HMRC
Here we go again
All you lot moaning about the consequences of the Overlap Relief Time Bomb that you have had approximately 25 years to face up to and deal with
When I have raised it here before over the years, it was pooh-poohed, but it has always affected those who were forced to end their self employment (and the estates of those who died). Just in a piecemeal fashion.
Let's hope the Newspaper that picks up on this blames the accountants, not HMRC
There's actually a great opportunity for many taxpayers - provided they had more imaginative accountants than yourself.
I would've loved the opportunity to spread the excess profits over five years.
These "Excess Profits" you refer to are the point! Being able to spread them may avoid Higher Rates but it is still an unexpected tax bill.
Where is my failure of imagination?
These "Excess Profits" you refer to are the point! Being able to spread them may avoid Higher Rates but it is still an unexpected tax bill.
Where is my failure of imagination?
It's not unexpected. There was always going to be a tax bill. Just a bit sooner than it would otherwise have been.
I don't think that's what anyone is complaining about. I suspect everyone here will have overlap for the vast majority of clients, and it may only be sketchy where the client was taken on some time after commencement and, for whatever reason, the brought forward overlap profit was not available & had to be reconstructed from incomplete information.
The issue is the last minute rush to make the change to basis periods and immediately afterwards force through MTD, when we all know that HMRC systems remain utter carp and highly unlikely able to be able to cope (even if we can).
None of these things will supposedly cost the taxpayer anything to manage (according to HMRC) . Most people this side of the fence can see additional costs aplenty to achieve what exactly for HMRC (other than accelerate tax take)
Finance Bill details here: https://bills.parliament.uk/publications/43399/documents/874 - from page 87
Explanatory Notes here: https://publications.parliament.uk/pa/bills/cbill/58-02/0184/en/210184en... - from Page 15
- Largely as set out before in the consultation.
- Spreading is automatic with option to accelerate some/all in each of years 1-4 by election
- Nothing I could immediately see re allowing spreading if one bites the bullet and changes accounting date early
- Spread profits are treated as a separate component for the tax calculation ITA s23 and one compares the liability including it and excluding it at Step 2, and add in the difference at Step 7 as the tax on spread profits. Not sure that helps with anything much but maybe I have missed a step