Start talking about earlier payment of taxby
Ahead of the Budget on 27 October, Anita Monteith has suggestions around earlier payment of income tax. Perhaps we need different rules for larger and smaller self-employed businesses.
Long-established tax rules determine when income tax is paid on business profits. These govern the time interval between earning a taxable profit on a sale and paying tax on that profit, often requiring a payment on account. We also have the basis period rules, unchanged since we moved from the preceding year basis to the current year basis around a quarter of a century ago.
A lot has changed in that time and technology has been a key driving force. I recall using DOS rather than Windows, achingly slow.
Questions to ask
Life has changed a lot since the mid 1990’s and now things happen much closer to real time. Clearly earlier payment of tax has been considered in some circles of government and perhaps that is not so unreasonable for many?
I have heard people theorise about something akin to PAYE for the self employed. Maybe that is worth exploring?
One size does not fit all - there is a world of difference between someone who works as a self employed writer and an international partnership with thousands of employees. Currently, the basis period and income tax payment rules are largely the same for all businesses in income tax self assessment (ITSA). Is it time to look again at whether this still works?
We already have the cash basis for smaller businesses. Having trained as a very traditional accountant, I was against this initially. I advised a cautious approach in deciding who might ignore the accruals basis and so lose focus on their working capital. In fact, the cash basis for income tax purposes serves a very useful purpose for many people.
Changing the basis for taxing profits from accruals to cash moves tax receipts, but not always forwards. But it is simple and a lot of taxpayers like it because the tax due is better aligned to the cash they collect from customers.
The cash basis limit for income tax is currently just £350,000 while for VAT it’s £1,350,000 so there could be room for manoeuvre here. Perhaps this could be a Budget surprise from the Chancellor?
How else to collect tax receipts earlier?
Another way to narrow the gap between earning and paying income tax might be to require more payments on account for a year? This would be possible for many businesses, and would mirror the way corporation tax is paid by large corporates. If this was one of the considerations behind the government’s recent basis period proposals, it would have been a better way to address the tax payment aspect.
Of course one of the main problems with the basis period suggestions was the need for estimates and amended returns for those with accounting periods which didn’t align with the tax year. The additional administrative burden they would have faced was a serious issue.
ICAEW observed that the overwhelming majority of ITSA businesses already used 31 March or 5 April as their year end anyway, and those which didn’t had good commercial reasons for not doing so. Clearly if these rules are ever brought back for a second try, this might be a better way to move forward.
Start the conversation
I am not recommending any change in particular, but just stating some alternatives which might be relatively straightforward compared to some of the suggestions we have seen recently. I think that is what the Tax Administration Framework Review was all about. Let us have that conversation.
Luckily the basis period changes have been paused pending further discussion. But we don’t have long, bearing in mind that for any change to be implemented, new systems must be designed, tested and then communicated.
Recently, ICAEW joined together with the CIOT, ICAS and ATT to ask the Financial Secretary to the Treasury to slow down the pace of change. We have already noted that slotting the basis period proposals in ahead of MTD ITSA would have been just one change too many in such a short period.
But to return to earlier tax receipts, if the UK does want these from the self-employed, then we should say so, and with a few carve outs, most of the suggestions I make above could work.
You might also be interested in
Anita is senior technical manager responsible for tax policy at ICAEW, working both on new tax policy proposals and also on their practical implementation.
Anita has been closely involved with digital developments in tax and is currently involved in Making Tax Digital as well as on the recent developments in off-payroll working (IR35)....