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Current Year Basis finally runs out of road

It has moved from consultation to forecast to scheduled legislation

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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)

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By I'msorryIhaven'taclue
28th Oct 2021 11:31

Is this a step towards delaying MTD SA?

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Replying to I'msorryIhaven'taclue:
By Paul D Utherone
29th Oct 2021 00:29

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)

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By Paul Crowley
28th Oct 2021 11:56

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"

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RLI
By lionofludesch
28th Oct 2021 12:31

When I was a lad, pretty much every farm had a 5th April year end, as a legacy of the old Schedule B days.

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Replying to lionofludesch:
By SteveHa
28th Oct 2021 12:56

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.

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Replying to SteveHa:
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By lionofludesch
28th Oct 2021 13:02

SteveHa wrote:

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.

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By Duggimon
28th Oct 2021 12:35

I shall be sure to tell all my negatively affected clients that HMRC have advised they are not negatively affected.

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Replying to Duggimon:
By ireallyshouldknowthisbut
28th Oct 2021 12:47

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.

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By Hugo Fair
28th Oct 2021 17:06

Late Addition (I'm a slow reader of all the post-Budget publications) ... as proof that HMRC can't help from breaking into doublethink (even when arguably they have a valid point)!

Discovery Assessments:
"The government will legislate in Finance Bill 2021-22 to put beyond doubt that HMRC may use its “discovery” assessing powers to recover certain tax charges including the High Income Child Benefit Charge (HICBC), those relating to Gift Aid Donations and a number of pension charges.
This measure will apply prospectively and retrospectively to provide certainty that HMRC may use section 29(1)(a) of the Taxes Management Act 1970 as designed and intended, following recent challenges before the courts that previously issued assessments were invalid.
The measure does not create any new or additional obligations or liabilities for taxpayers. It clarifies the legislation to ensure the rules work as designed and intended."

So despite the new legislation being needed because "recent challenges before the courts that previously issued assessments were (found to be) invalid" ... the new rules to make them valid won't "create any new or additional obligations or liabilities for taxpayers"!

This statement could only make sense to someone who believes that HMRC were right (and the courts therefore wrong) up 'til now ... in other words the liabilities always existed - it's just that the courts were too stupid to understand that.
Or, bluntly, the Legislature & State are there to serve HMRC not the other way round!

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Replying to Hugo Fair:
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By lionofludesch
28th Oct 2021 17:18

Hugo Fair wrote:

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.

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By Paul D Utherone
28th Oct 2021 20:26

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

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Replying to Paul D Utherone:
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By Paul Crowley
28th Oct 2021 21:12

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

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Replying to Paul Crowley:
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By lionofludesch
28th Oct 2021 21:58

Paul Crowley wrote:

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

Never had a client who didn't know fine well about overlap relief. Though I did need to explain it first.

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Replying to Paul D Utherone:
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By Hugo Fair
28th Oct 2021 21:22

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!

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Replying to Hugo Fair:
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By Paul Crowley
28th Oct 2021 21:58

+1

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Replying to Hugo Fair:
By Paul D Utherone
29th Oct 2021 00:23

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

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Replying to Hugo Fair:
RLI
By lionofludesch
29th Oct 2021 17:01

Hugo Fair wrote:

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.

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Replying to lionofludesch:
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By Hugo Fair
29th Oct 2021 17:59

"Would you buy a used car from her ?"

I wouldn't buy a new car from her - given that her unspoken definition of 'new' might well turn out, after the event, to include 'pre-loved by 5 owners one of whom re-built it after a major crash to an as-new standard'.

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RLI
By lionofludesch
28th Oct 2021 22:11

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.

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Replying to lionofludesch:
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By Hugo Fair
28th Oct 2021 23:07

You struggled through it too then? I feel a campaign medal is due!

The whole thing should be forcibly played to anyone who fails to understand how dysfunctional and disconnected from the real world HMRC has become.
The questioners were hardly Inquisitor standard (hello, Dido Harding), but HMRC still managed to showcase their total incomprehension of everything out there.

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By Paul D Utherone
29th Oct 2021 00:34

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.

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Replying to Paul D Utherone:
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By Hugo Fair
29th Oct 2021 15:26

'Idle hands' and 'Details' ... there's a common missing word somewhere in there!

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By Michael Davies
29th Oct 2021 12:20

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.

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Replying to Michael Davies:
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By lionofludesch
29th Oct 2021 12:35

Michael Davies wrote:

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.

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Replying to Michael Davies:
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By lionofludesch
29th Oct 2021 12:35

Michael Davies wrote:

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.

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Replying to lionofludesch:
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By Hugo Fair
30th Oct 2021 11:45

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'!

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Replying to Hugo Fair:
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By lionofludesch
30th Oct 2021 12:20

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'!

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.

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Replying to lionofludesch:
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By Hugo Fair
30th Oct 2021 12:58

Which is why there should be someone like you asking the questions of HMRC ... not a bunch of well-meaning people (mostly Lords and Ladies for some reason) that appear to have even less practical knowledge of Tax than the superannuated time-servers from HMRC!

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Replying to Hugo Fair:
By Paul D Utherone
31st Oct 2021 11:04

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"

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.

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Replying to Paul D Utherone:
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By lionofludesch
31st Oct 2021 11:17

Paul D Utherone wrote:

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."

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Replying to Hugo Fair:
David Ross
By davidross
02nd Nov 2021 10:38

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 !

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Replying to davidross:
RLI
By lionofludesch
02nd Nov 2021 13:36

davidross wrote:

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.

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Replying to lionofludesch:
David Ross
By davidross
03rd Nov 2021 17:36

I have inherited such cases and dealt with them straight away !

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Replying to davidross:
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By lionofludesch
03rd Nov 2021 17:44

davidross wrote:

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 ?

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Replying to lionofludesch:
David Ross
By davidross
04th Nov 2021 21:18

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.

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Replying to lionofludesch:
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By Paul Crowley
31st Oct 2021 20:21

If there was no record then, on cessation any old figure would do

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Replying to Paul Crowley:
RLI
By lionofludesch
31st Oct 2021 22:16

Exactly.

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By Paul D Utherone
01st Nov 2021 09:49

Report on the PB's evidence to the Lords Committee - https://www.tax.org.uk/lords-basis-period-hearing-too-many-unanswered-qu...

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Replying to Paul D Utherone:
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By Hugo Fair
01st Nov 2021 12:28

Interesting.

I guess it's faintly encouraging that the questions raised by the PBs were more relevant and focused than those raised by members of the HoL at the Finance Bill Sub-Committee (for which you also provided a link higher up this thread).
Of course, so they should be ... but it shows how little impact these committees have if the info gained isn't used in subsequent forums.

It almost makes you realise that the powerlessness of Aweb contributors is on a par with the lack of impact of both Parliamentary houses!

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David Ross
By davidross
01st Nov 2021 09:56

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

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Replying to davidross:
RLI
By lionofludesch
01st Nov 2021 10:26

davidross wrote:

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.

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Replying to lionofludesch:
David Ross
By davidross
02nd Nov 2021 10:41

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?

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Replying to davidross:
RLI
By lionofludesch
02nd Nov 2021 13:39

davidross wrote:

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.

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Replying to davidross:
By Duggimon
01st Nov 2021 10:55

I'm not 100% sure what point you're making but I'm 100% sure it's wrong.

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Replying to davidross:
By Paul D Utherone
01st Nov 2021 12:50

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)

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By Paul D Utherone
04th Nov 2021 12:49

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

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