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Basis periods to be abolished in 2022

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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.

22nd Jul 2021
Tax Writer Taxwriter Ltd
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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.

Why now?

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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Replies (154)

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Replying to lionofludesch:
avatar
By wave2dave
05th Aug 2021 10:46

Easy peasy. I was clearly over-thinking things!

Next question.... the "gap" either side of the year of change would be 7 months so we'd create overlap by using 5 months' of profit from the previous period.

Overlap will mostly become a thing of the past under the new provisions but actually in this case they'll already have overlap (Aug year end) and create more on a change of date. And so the only relief they'll get for that when leaving the business.

If they didn't change the year end they wouldn't create any additional overlap and would be able to utilise the existing overlap in the transitional year.

Thus they'd be better off from a tax perspective not changing the accounting date - notwithstanding any non-tax issues at play.

If you happen to be reading this and believe me to be talking nonsense please shout!

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Replying to wave2dave:
RLI
By lionofludesch
05th Aug 2021 14:40

wave2dave wrote:

Easy peasy. I was clearly over-thinking things!

Next question.... the "gap" either side of the year of change would be 7 months so we'd create overlap by using 5 months' of profit from the previous period.

Overlap will mostly become a thing of the past under the new provisions but actually in this case they'll already have overlap (Aug year end) and create more on a change of date. And so the only relief they'll get for that when leaving the business.

If they didn't change the year end they wouldn't create any additional overlap and would be able to utilise the existing overlap in the transitional year.

Thus they'd be better off from a tax perspective not changing the accounting date - notwithstanding any non-tax issues at play.

If you happen to be reading this and believe me to be talking nonsense please shout!

OK - I'll say it. You're talking nonsense.

You wouldn't create more. You'd eliminate it in its entirety by moving to a 31 March year end.

You would only create more overlap relief by shortening the year end to a date between its current 31 August and the preceding 6th April. Which, given that you'll need to change to 31 March very soon, is a crazy idea.

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By mydoghasfleas
18th Aug 2021 11:10

I have not worked this through on examples but thought I would throw it out (probably to have it chewed and spat back). The risk for many is that not only will they have greatly increased liability when it takes effect because more profit falls into one basis period but also the compression will push them up the rate bands and reduce personal allowances.

I think this was mentioned by Robert-AT (I can't remember the name, sorry Robert) but I did not see anything else.

Would it be useful to extend the accounting period for the current year by a change of accounting date to some point between the current accounting and the tax year end/31 March? That way some of the profits are taken in the earlier year with possibly lower rate compression. It would need tailoring to individual circumstances (one year's loss of allowances is preferable to two years) but for someone on regular profits running the figures to different dates might produce a better outcome. Should we be heading to spreadsheets to run a what if on accounting dates for the intervening year?

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Replying to mydoghasfleas:
RLI
By lionofludesch
18th Aug 2021 12:05

mydoghasfleas wrote:

I have not worked this through on examples but thought I would throw it out (probably to have it chewed and spat back). The risk for many is that not only will they have greatly increased liability when it takes effect because more profit falls into one basis period but also the compression will push them up the rate bands and reduce personal allowances.

I think this was mentioned by Robert-AT (I can't remember the name, sorry Robert) but I did not see anything else.

Would it be useful to extend the accounting period for the current year by a change of accounting date to some point between the current accounting and the tax year end/31 March? That way some of the profits are taken in the earlier year with possibly lower rate compression. It would need tailoring to individual circumstances (one year's loss of allowances is preferable to two years) but for someone on regular profits running the figures to different dates might produce a better outcome. Should we be heading to spreadsheets to run a what if on accounting dates for the intervening year?

There's no one size fits all answer. It will depend on the numbers.

But if you do change a year - or two - early, bear in mind that you may have a problem with the interaction with SEISS and, maybe more important, you won't be able to spread over five years. For those with a huge discrepancy between overlap and current profits, spreading in2023 is likely to be the answer but, even then, it may not be. I could see a scenario, for instance, where spreading would mean paying five years HICBC instead of just the one.

Be very careful.

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