Basis periods to be abolished in 2022by
Some unincorporated businesses will have bumper tax bills for 2022/23 as their accounts reporting is adjusted to fit exactly to the tax year from 6 April 2023, in preparation for MTD.
Draft legislation will be included in Finance Bill 2022 to abolish basis periods for businesses that pay income tax on profits calculated on a current year basis.
From 2022/23 those taxpayers will have to report to HMRC the income and expenses that arise precisely in the tax year – ie on an ‘tax year basis’. Losses will be those arising in the tax year.
Tax advisers with long memories will recall that on the introduction of self assessment in 1995/96, the basis for assessing income tax from unincorporated businesses was changed from the prior year basis (reporting accounts from periods ending in the previous tax year) to the current year basis (reporting accounts for periods ending in the current tax year).
MTD forces change
With the introduction of MTD for income tax from April 2023 (MTD ITSA), the reporting of accounting data is to be aligned exactly with the tax year.
The law will deem accounting periods ending on dates between 31 March to 4 April as ending on the tax year end: 5 April. Any income/expenses arising after the end of the accounting period will fall into the next tax year. This will apply to both trading and property businesses.
Businesses which already draw up accounts to 31 March or 5 April will see no practical difference from 2022/23. Property letting businesses already have to report to the tax year, but in practice many draw up their accounts to 31 March, which by concession, is treated as a period ending on 5 April.
Without this change to reporting periods taxpayers with several sources of income would need to file MTD reports for differing quarterly periods in the tax year, leading to up to 13 MTD filings required per year, plus VAT returns.
Under the tax-year basis the self-employed taxpayer will file MTD reports for all their sources of income by the same date each quarter, with a possible deviation for VAT if their VAT returns are not in the stagger one group (March, June, September and December quarter ends).
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