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Treasury clears its shelves ahead of summer recess
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Consultation alert: Basis period simplification

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The “school’s out” mood has taken hold in Whitehall, as the Treasury cleared its shelves of draft legislation and consultation documents before Parliament breaks up for summer.

20th Jul 2021
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HMRC has opened up a six-week consultation period to solicit views on proposals to simplify basis period rules for taxing income from self-employment. The tax department wants to make it easier for businesspeople to work out what tax they should pay when their accounting periods cut across the 5 April tax year end.

“The current rules date back to the mid-1990s and are themselves derived from a system that dates back to the 1920s,” noted first secretary to the Treasury Jessie Norman in his introduction to the consultation.

The rules are “straightforward” for the 93% of sole traders and 67% of business partnerships that draw up their annual accounts to align with the 5 April tax year end (or 31 March, which HMRC normally treats as equivalent to 5 April), the minister said.

“But choosing an accounting date different to the tax year-end creates complexities that lead to businesses making many thousands of tax return errors every year. While large firms and those with professional advisers understand the rules and find them straightforward to apply, less sophisticated taxpayers find the rules opaque, illogical and unfair.”

The proposal, which is the culmination of a five-year conversation that started at the Office of Tax Simplification, would make the 5 April/31 March tax year end the default basis period for all trading income, aligning it with all other forms of income.

The idea is fuelled by the march towards Making Tax Digital, which revolves around end-of-quarter reporting and prompted a counter proposal from ICAEW Tax Faculty manager Anita Monteith to change the tax year end to 31 March. Issues of this nature generate a lot of emotion and debate, so the firing gun has started now.

More draft legislation

The Treasury's shelves of draft legislation will be a little lighter today. Alongside the clauses to reform the basis period rules, the latest tax policy consultation tracker flags up further draft legislation that was published on Tuesday 20 July, including:

Did someone mention MTD?

Not to be overlooked in the documentation clear-out is a study into the impacts of MTD for VAT on business. The 49-page report by IFF Research was based on a survey of 2,000 businesses during November and December 2020 and offers some headline estimates on the costs and changes that were required by the switch in VAT reporting in 2019.

Just over half (55%) the respondents reported incurring additional costs to prepare for MTD, with new accounting software the frequently mentioned expense (26%). Just under a quarter of businesses of all sizes (24%) undertook discussions with their accountants or bookkeepers and 16% increased their use of outside advisers.

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Replies (7)

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RLI
By lionofludesch
20th Jul 2021 18:39

Interesting.

76% of businesses didn't consult an advisor and two thirds of businesses thought that MTD had reduced the potential for errors.

Thanks (1)
Replying to lionofludesch:
By SteveHa
21st Jul 2021 09:29

Actually, that's 76% of respondents, and we don't know the sample size, so is a meaningless statistic.

Thanks (0)
Ivor Windybottom
By Ivor Windybottom
21st Jul 2021 09:34

Dunno what all the fuss is. As I see it MTD will only work sensibly if we adopt a monthly/quarterly basis, not a tax month ending on the 5th.

Obviously the best year to adopt would be the calendar year, but the hassle of making such a big change means 31 March will be chosen. Forget consultations JFDI.

One small step in the right direction, so MTD has one benefit!

Thanks (0)
Replying to Ivor Windybottom:
RLI
By lionofludesch
21st Jul 2021 09:52

Ivor Windybottom wrote:

Obviously the best year to adopt would be the calendar year....

Why "obviously" ?

I'm sure there'll be plenty of financial advisors who wouldn't be too thrilled at your transferring a massive workload to the holiday period.

For me, the worst possible year end would be 31 December.

Thanks (0)
avatar
By North East Accountant
21st Jul 2021 13:19

Per the minister "less sophisticated taxpayers find the rules opaque, illogical and unfair.”

Using this logic every single tax rule is going to have to be simplified.

Thanks (0)
Replying to North East Accountant:
RLI
By lionofludesch
21st Jul 2021 13:24

North East Accountant wrote:

Per the minister "less sophisticated taxpayers find the rules opaque, illogical and unfair.”

Using this logic every single tax rule is going to have to be simplified.

What's unfair about choosing your own accounting date ?

What's wrong with becoming a more sophisticated taxpayer ?

I'd be interested in his views.

Thanks (0)
avatar
By adam.arca
22nd Jul 2021 17:54

I’m confused.

If 93% of sole traders and 67% of partnerships already align their accounting year to the tax year, then they are obviously not going to be affected by this change and only a small minority will.

So, how would making this change a) be worth the effort given the small proportion affected, b) improve matters as one set of special rules (which are well understood despite the rubbish which HMRC got the minister to sign off) are replaced by another, or c) be a simplification of any sort when the new rules would likely require significant use of estimated profits?

Thanks (0)