Delay basis period reform and MTD ITSAby
Accountancy and tax bodies have slammed the proposed switch to the tax year basis as rushed and poorly planned, and said the change will add complexity for some businesses and undermine trust in the tax system.
In responding to the consultation on basis period reform the leading tax bodies (CIOT and ATT) say the switch from the current year basis to the tax year basis should be delayed for at least a year to 2023/24, while the ICAEW has called for the proposal to be abandoned completely.
The government wants to implement the change to the tax year basis ahead of mandating MTD for income tax (MTD ITSA). But this switch would mean a big bang mandation of nearly all unincorporated businesses into MTD ITSA from 6 April 2023, rather than a staged introduction, based on the business’ existing accounting year end. For example, under the original MTD proposals a business with a year end of 31 March would be mandated into MTD ITSA from 1 April 2024.
The CIOT, ATT and LITRG have argued for MTD ITSA mandation to be delayed for at least a year. The ICAEW would prefer the original timetable for MTD ITSA and the current year basis to be retained, giving businesses with a 31 March accounting period end (and their advisers) an extra year in order to prepare for MTD.
This combined stage 2 and 3 consultation on basis period reform ran for six weeks, almost exactly aligning with the summer holiday season (stage 1 was either informal or missed completely). This is half the time recommended for meaningful consultation on one of the “fundamental building blocks of the tax system” (as the consultation mentions).
Many AccountingWEB readers recalled that the last change in basis periods in the mid-1990s was conducted over a longer period. The change from the prior year to the current year basis was announced in March 1994, legislated for in FA 1994, and came into effect with a transition year in 1996/97. Tax advisers and businesses thus had around two years to prepare for the change, which was made in order to implement self-assessment.
The CIOT argues that the change to the tax year basis needs to be introduced over a similar timescale, which would mean an implementation in 2023/24 as the transition year, at the earliest.
Increased complexity not simplification
The switch to the tax year basis does not require businesses to change their accounting year end to align with the tax year (31 March to 4 April will be treated as 5 April), but any other year end will mean taking figures from two set of accounts in order to complete the tax return.
Where the accounting period ends later in the year (say September onwards), it is unlikely that the second set of accounts will be finalised in time for the tax return deadline of 31 January. In such cases the tax return will have to include estimated figures, which will need to be corrected once the accounts are finalised. This will increase costs as each affected tax return will have to be processed and submitted twice.
Although the change to the tax year basis will get rid of the confusing rules for taxing a new business, which can generate overlap profits, it will create the need to estimate profits every year for some businesses. This will increase complexity and costs for those businesses and will certainly not lead to simplification.
Changing the accounting period
Many businesses chose an accounting period end other than 31 March/ 5 April for commercial reasons, such as:
- Farmers chose 30 September as its easier to value harvested crops at that date
- GP medical practices need to take into account the interaction with superannuation certificates which determine pensionable profits based on taxable profits.
- Large partnerships may be required to draw up accounts to the period end of their wider international partnership business, which will normally be 31 December.
- Hospitality businesses chose a quiet trading period away from the busy Easter and summer holidays.
It appears that the requirement for stock taking at the year-end has not been considered in the consultation. If all unincorporated businesses use an accounting period ending in the six days to 5 April, the stock for all of those businesses will have to be valued in the same week. This will put a considerable strain on specialist valuers which are needed in sectors such has hospitality.
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