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Finance Bill 2022: New taxes and new tax basis

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Finance Bill 2021/22 introduces two new taxes, the economic crime levy and residential property developer tax (RPDT), but the imposition of the tax year basis is more important for most accountants.

5th Nov 2021
Tax Writer Taxwriter Ltd
Columnist
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The Finance Bill 2021/22, which will become FA 2022 when it is passed, is a modest sized bill of 102 clauses and 16 schedules over only 194 pages, but it has room to grow before it is passed.

In addition to the income tax rates for 2022/23 (cls 1-5), which are as announced on Budget Day, the Bill also confirms that the deadline to report disposals of residential property completed on or after 27 October 2021 as the 60th day following completion of the deal (cl 23).

Tax year basis 

Schedule 1 is the key part of the Bill for accountants in practice, as it abolishes the current year basis for self-employed trades and professions from 2024/25, with a transition year in 2023/24.

As following this abolition there would be no other prescribed way to assess profits, those self-employed profits or losses must be assessed on an arising basis in the tax year – ie on the tax year basis.

If the business does not have a period of account that coincides with the tax year it will have to apportion profits or losses from the periods of account that partially cover part of the tax year, by reference to the number of days in each accounting period falling in the tax year. This is a permanent complexity and an additional cost for those businesses as each.

Where the accounting period ends on a date between 31 March and 4 April it is treated as ending on 5 April. Any profits arising between the end of the accounting period and 5 April are deemed to arise in the next tax year (new ITTOIA 2005, s 7C).

There are two provisions for new businesses:

  • Where the business commences and doesn’t cease in 2023/24, its basis period for 2023/24 is treated as ending on 5 April 2024.
  • For 2024/25 and later years, where the business commences on or after 31 March, its profits for those few days to 5 April are treated as arising in the next tax year (new ITTOIA 2005, s 7B).

Calculating the tax for 2023/24

The basis period for the transition year (2023/24) is defined as starting immediately after the end of the basis period for 2022/23, and ending on 5 April 2024, without exception. Where this basis period is longer than 12 months, the upper threshold to use the cash basis is increased proportionately.

The long basis period is then divided into two notionally separate basis periods:

  1. Standard – the first 12 months
  2. Transitional – rest of the basis period, less any overlap profits. These transitional profits are ignored for farmers and creative artist averaging.

The two basis periods, A and B, are dealt with separately with allowances and income- sensitive deductions or charges for 2023/24 calculated in relation to, and deducted only from, profits in period A. 

The profits calculated from period B are spread equally over five years: 2023/24 to 2028/29, with 20% treated as arising in each of those years. The taxpayer can opt out of this automatic spreading of profits. If the trade ceases before 2028/29 all the remaining profits from period B are taxed in the year of cessation. 

I pity the tax software programmers who have got to code all this into their tax software for 2023/24.

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Replies (26)

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By Paul Crowley
05th Nov 2021 19:00

Much appreciated
It would be helpful if HMRC listed the overlap relief on the agent portal under Information to help complete your tax return, similarly for the client version

But being helpful does seem not to be on HMRC agenda
The promise made to House of Lords will be reneged upon or turn into a letter suggesting client phones HMRC to ask.

Thanks (3)
Replying to Paul Crowley:
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By graydjames
08th Nov 2021 10:02

Just on this point, I had to contact HMRC, a little less than a year ago, seeking overlap relief for a client that had incorporated his business. The overlap in question arose from the change to the current year basis - roughly a quarter of a century ago!

They were able to give me the figure quite quickly; however, I recall quite specifically that the HMRC representative told me that I was lucky because the year in question was still on his screen, but that it would be archived off very soon.

I have no idea what this would mean, in practice, even if the intelligence was accurate; however, it implies that, once it has gone "off screen", retrieving the figure will be a good deal more complicated. We must hope that there will be some procedure, as mentioned in the relevant HMRC document on budget day, to make this easy.

Of course there will be the usual wise guys who claim that the information should be available in our own records; but there are myriad reasons why this might not be so, too numerous to mention here.

Thanks (3)
Replying to graydjames:
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By Paul Crowley
08th Nov 2021 11:46

Agree
We have at least two missing on getting clients from former "agents"
Never on any of the returns and ignored on requests for information.
I looked for all these whem I finally took over the firm 5 years ago. Disappointed that the older partners had quite a few in paper records that did not go onto returns.

Thanks (0)
Replying to graydjames:
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By Ken of Chester le Street
26th Nov 2021 15:17

"Goes off screen".
does this mean forgotten, do you think?
If so, what are the implications for capital gains rolled over 22 years ago? I mean practical, not ethical, which each of us deals with in his own way.

Thanks (0)
Replying to graydjames:
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By Ken of Chester le Street
26th Nov 2021 15:17

"Goes off screen".
does this mean forgotten, do you think?
If so, what are the implications for capital gains rolled over 22 years ago? I mean practical, not ethical, which each of us deals with in his own way.

Thanks (0)
Replying to Paul Crowley:
By SteveHa
08th Nov 2021 11:35

Ha ha. Best laugh I've had all day.

On occasions when I've had to ask HMRC for overlap profits the best I've had from them is copy Returns for year one and year two, so that I could work it out myself. Not sure they have a clue what the overlap profits are themselves.

Thanks (0)
Replying to Paul Crowley:
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By AndrewV12
24th Nov 2021 10:43

Bloody good point.

Thanks (0)
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By Agutter Accounts
08th Nov 2021 10:02

I now habitually put new clients on an April 5th year end so fortunately I have only a couple of clients who have been in business a long time. When I first started as self-employed nearly 11 years ago HMRC required a tax return for the first 2 months of my business and I have filed for the tax year ever since.

What I think should concern us is that this will overlap the MTD Digital for ITSA. The potential for a double whammy of problems is legion.

Thanks (2)
Replying to Agutter Accounts:
By Charlie Carne
08th Nov 2021 12:47

Why not 31st March, which has long been an acceptable equivalent for 5th April in trading (but not rental) accounts? This "equivalence" of 31/3 and 5/4 continues today.

Thanks (1)
Replying to charliecarne:
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By Agutter Accounts
08th Nov 2021 14:32

Why not? because nothing concerning tax is ever straightforward as we all know. You look at who makes the rules and you realise why this is so.

Thanks (1)
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By Ben Alligin
08th Nov 2021 10:19

Please can you clarify the footnote at the bottom of the article.

A number of tax experts will be discussing this .....at Live Expo. Are you classifying Giles McCallum as a tax expert? By his own admission and CV he has no knowledge whatsover about tax; presumably that is why HMRC made him the Director for MTD-ITSA, so I would beg to differ.

Unless of course he has spent the last 2 weeks taking up the numerous kind offers made by accountants in response to his article on the benefits of MTD, in which case he might have a little more of an understanding of what is involved, but that doesn't make him an expert!

Thanks (4)
Replying to Ben Alligin:
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By Open all hours
08th Nov 2021 14:18

As one who offered to help, I can confirm that Mr McCallum has not yet been in touch.

Thanks (0)
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By geoffmw1
08th Nov 2021 11:20

How will quarterly digital info deal with stock which could well spook HMRC#

Thanks (1)
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By petestar1969
08th Nov 2021 11:26

I remember years ago when overlap profit first became an issue. I was at a training event presented by Tim Good and he made it very clear that every accountant should keep a note on their permanent files of overlap profit for all clients because "one day we will need it and you can't rely on HMRC keeping records".

Well here we are.....

I do worry though about clients who have moved accountant{s} and their new accountant{s} not being given the relevant information by the former accountant{s}.

Thanks (2)
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By Donald MacKenzie
08th Nov 2021 11:46

I recently called HMRC to ask for overlap profits figures for the three self-employed clients that I took on from other accountants that do not have a March year end. They were able to give me the numbers (most from the start of self-assessment in 1997) within a few minutes.
An unusual success rate for a call to HMRC.

I also found that it is possible to update a year end to report MORE than eighteen months so have shifted a June 19 year end all the way up to March 2020 and submitted a revised 2019/20 return and reduced the tax due by utilising overlap profits. You report the "extension" period as if it is the results for the period, show the full period dates within "basis period" in boxes 66 ands 67 with the "original" reported profit as an adjustment in box 68.
It is not as complicated as that sounds and worth it to get benefit of overplap sooner.

Thanks (0)
By Charlie Carne
08th Nov 2021 12:46

Given the change to basis periods and the fact that HMRC have long treated 31/3 and 5/4 as equivalent for trading accounts, where no overlap profits etc. are required for any y/e dated 31 March - 4 April (historic treatment and current treatment), I strongly wish that they will allow the use of the same treatment for rental income, as proposed by the OTS in their September 2021 publication "The UK tax year end date: exploring the potential for change"

Thanks (0)
Replying to charliecarne:
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By Ardeninian
08th Nov 2021 13:12

Your wish is granted, Charlie! Clause 8 of the Finance Bill is introducing 31/3 and 5/4 equivalence for property businesses from 2023/24.

Thanks (0)
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By North East Accountant
08th Nov 2021 12:54

When best to change the basis period?.....I know think HMRC let's do it at the same time as the biggest change to the tax system ever.......what could possibly go wrong.

Thanks (0)
Replying to North East Accountant:
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By Ardeninian
08th Nov 2021 13:13

It worked in 1996/97...

Thanks (0)
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By Ardeninian
08th Nov 2021 13:32

Worth noting that new s7B and 7C applies to new businesses in 2023/24 as well, so if the accounts go to 31 March then 1-5 April go into 2024/25, even though the basis period runs to 5 April.

Thanks (0)
Morph
By kevinringer
08th Nov 2021 13:56

".... although in evidence to the House of Lords Finance Bill committee the HMRC spokesperson said that basis period reform is an enabler for MTD. She also said that basis period reform was critical to MTD."

I have listened to the House of Lords recording. It was Bridget Micklem who made the above comment. She did not explain why it was critical for MTD. Also, she frequently made reference to "tax codes". These are PAYE and nothing to do with MTD. What is she talking about?

Thanks (0)
Replying to kevinringer:
Morph
By kevinringer
08th Nov 2021 14:29

During the committee meeting Thomas Brown said HMRC would work with the rep bodies to get the message across to unrepresented taxpayers. The rep bodies won't be able to help because they deal with agents (and thus represented taxpayers).

Thanks (0)
Replying to kevinringer:
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By Paul Crowley
08th Nov 2021 14:43

HMRC really are clueless
How could those bodies help?
Those bodies clearly did not offer, and clearly not their purpose

Thanks (0)
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By Michael C Feltham
09th Nov 2021 12:13

I'm a bit late for the party, however;

The new levy for "Economic crime"...hm will HM Government be levied since they are the very worst economic criminals of all??
More seriously, this cost will be passed over to the supervisory bodies who regulate accountants in practice, i.e. our professional bodies, who pass on the cost to us!

Now the truth amongst all this compliance marlarky is that the real criminals are banks and drugs dealers and mass importers of drugs, plus Eastern European scamsters, the Russian Maffiya, the Nigerian gangs who have moved on from simple ICC 290 fraud via emails, to more complex cyber crime and etc.
I don't know about you, but I have ever numbered international banks and/or Eastern European Mafioso amongst my clients!

The vast majority of practitioners are sole traders or very small partnerships: yet, once again, Government load us with costs and a job THEY ought to be doing, with all their resources such as Interpol, MI5, SIS etc.

Thanks (2)
Replying to Michael C Feltham:
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By Agutter Accounts
09th Nov 2021 14:44

Yes, what about the former attorney general, who spent lock down in the Caribbean? Apparently he is one of the biggest defenders of tax havens. The recent Pandora Papers raised the lid on some very dodgy practices that implicated all sorts of important people.

Thanks (1)
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By AndrewV12
24th Nov 2021 10:42

A good article, keeping us up to date and on our toes.

Mmm one or two stealth taxes in there, I had never heard off anyway.

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