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Tax year basis: The cost of estimated figures

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The tax year basis is a problem of HMRC’s making, but it wants to marginally reduce this unnecessary admin burden by asking how businesses could efficiently correct estimated profit figures.

6th May 2022
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HMRC has circulated a consultation paper, to selected professional accountancy and tax bodies, asking for views on how unincorporated businesses should update any provisional figures reported for earlier tax years.

As I explained at the time of the Autumn 2021 Budget, the switch to the tax year basis will seriously inconvenience unincorporated businesses that do not use a 31 March or 5 April year end (or a date between). Those businesses will have to apportion accounts figures from two accounting periods to complete their finalisation statement (replacement for tax return) under Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA).

Where the accounts for the later accounting period have not been finalised by the deadline for submitting the finalisation statement (31 January after the tax year end), provisional figures will be required to be included. Those estimates will then have to be corrected to actual amounts at a later date, incurring additional costs as each finalisation statement will have to be “finalised” twice.

This will also have knock-on effects for the accuracy of tax paid by 31 January (initially based on estimated figures), penalties for inaccuracies, plus interest for any late paid tax. 

Ongoing costs

HMRC estimates that around 250,000 sole-trader businesses and 130,000 partnerships use an accounting period that is not aligned, or nearly aligned, with the tax year. All of these businesses will have to adjust their reported accounts figures for each and every year from 2024/25 onwards. 

This is an unnecessary and on-going cost, which achieves no benefit at all for the business and no obvious benefit for HMRC, other than possibly accelerating payment of some tax. However, it also carries greater risks of inaccuracies and underpayments. 

How to avoid estimated figures 

There are three ways HMRC could act to avoid businesses having to incur these unnecessary costs.

1. Scrap the tax year basis 

HMRC insists the switch from the current year basis to the tax year basis is required for MTD ITSA, so the quarterly tax estimates reflected back to the taxpayer make some sense. But in my summary of problems concerning the tax year basis, I pointed out that this argument does not stand up to scrutiny.

The only time a quarterly tax estimate will be useful to the taxpayer is if the frequency of income tax payments is changed to quarterly on-account payments. Incidentally this plan to accelerate tax payments was also raised back in the earlier days of MTD in 2016, under George Osborne, but was quietly forgotten at that time.

2. Extend the filing deadline 

The deadline for finalising the tax year could be extended to allow accurate figures from the later accounting period to be included. This would be difficult to implement as the length of the extension needed would vary from business to business with different accounting period year ends. The variability would require complex changes to legislation, and it would also uncouple the deadlines for tax payments and finalising the tax year.

3. Variable deadline 

Companies submit accounts and tax returns according to deadlines based on their accounting periods. It is conceivable that unincorporated businesses could do the same, filing and paying tax according to their accounting period end. However, HMRC is not keen on this idea.

Options for estimates 

Currently businesses can choose how they arrive at any provisional figures that are included on tax returns, although it can challenge any “unreasonable estimates”. 

HMRC is not planning to change this approach for the provisional figures that will be necessary under the tax year basis. The issue is how, and when, the business corrects those provisions figures to actual amounts once the second set of accounts is finalised.

There are three broad options.

1. Two passes

Amending the provisional figures for tax year 1 at the point where the finalisation statement for tax year 2 is submitted, which would in turn have to be amended when tax year 3 is submitted, and so on. This defers and doesn’t remove the administrative burden. It also doesn’t address the problem of penalties and interest for late-paid tax. 

2. One pass

When finalising the results for tax year 2, those results would include any amendments needed in respect of tax year 1. This means that year 1 does not need to be re-opened but the calculation of taxable profits for year 2 is complex. 

It could also create opportunities for tax avoidance or tax deferral if the year 1 profits are deliberately underestimated.

3. Ignore small differences 

Where the adjustment to the provisional figures is very small, below a certain de-minimis threshold, it could be ignored. HMRC would have to be happy to accept a small level of inaccuracy, which contradicts the principle that there is no materiality in tax. 

This approach could lead to some low-level deliberate tax avoidance behaviour.

How to respond 

This is normally the point where I refer you to HMRC’s consultation document, asking you to read and respond, but that document has not been published on Gov.uk. 

If you have views on any of the options set out above, you can respond to [email protected] and ask them for a copy of the consultation paper. 

You could also share your views with your professional accounting body. ICAEW has included a poll on the various options for its members to complete. Alternatively you could add comments below. HMRC does read this site.

Replies (55)

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Ivor Windybottom
By Ivor Windybottom
06th May 2022 14:33

HMRC could insist that everyone moves to a 5 April accounting date, so be careful what you wish for!

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Replying to Ivor Windybottom:
RLI
By lionofludesch
07th May 2022 10:43

Have they not done that ?

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Replying to Ivor Windybottom:
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By petestar1969
09th May 2022 10:28

I was just about to post that's the 4th way to avoid estimated profits, isn't it?

Thanks (1)
RLI
By lionofludesch
07th May 2022 10:47

"Companies submit accounts and tax returns according to deadlines based on their accounting periods. It is conceivable that unincorporated businesses could do the same, filing and paying tax according to their accounting period end. However, HMRC is not keen on this idea."

The problem with that is that companies have all their income shown in the one set of accounts (assuming things are done correctly).

That's not true for individuals. You could work with it in most simple cases but what if a taxpayer has two or three businesses, with different year ends, maybe an employment, investment income? It's not as easy as just having a flexible year end.

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By SteveHa
07th May 2022 12:32

Scrapping the tax year basis is the only sensible solution. Its introduction reeks of bureaucracy for the sake of bureaucracy. The unsupported assertion that it is needed for MTD ITSA just goes to show how ill-conceived MTD ITSA is.

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Replying to SteveHa:
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By Paul Crowley
07th May 2022 16:25

Agree entirely
Tax year basis for MTD ITSA is just a pants on fire lie
If it was, then it was known just so many years ago

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By Beef curtains
07th May 2022 17:33

Just another stupid idea from HMRC bureaucrats. The tax system is already hideously complicated. Scrap the MTD madness and this with it.

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David Ross
By davidross
09th May 2022 09:37

The Tax Year basis was to have been introduced with Self Assessment 25 years ago but the Inland Revenue gave in then to the accountancy profession's whingeing (deja vu !). It seems that they have now toughened up.

Most other Countries have more sense.

As I have said here many times before, Overlap Relief has been a scandal coming all this time and I have no sympathy with those who have let their clients down by not dealing with it before.

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By Ralph-gab
09th May 2022 09:49

I have never understood why Self assessment did not follow the lines of CT with tax payers having return periods based on their birthdays. This would have alleviated the January stress and meant that HMRC could have managed with a lesser system rather than having to cope with an enormous amount of returns being filed in a short period. But it doesn't! We have always put new clients on 31st. March y/e, but we do have one from before SA and current year assessment! Anyone else remember prior year assessment? Luckily we have kept the transition relief figure(overlap) from 40 years ago so we could change his y/e to 31st March from 30th June without too much bother but we'd have to retrain the client to send the appropriate figures in future. What happens if the transition/overlap relief figure has been lost?

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Replying to Ralph-gab:
RLI
By lionofludesch
09th May 2022 09:55

Ralph-gab wrote:
Luckily we have kept the transition relief figure(overlap) from 40 years ago ......

Impressive for a number that hasn't existed for more than 25 years.

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Replying to lionofludesch:
David Ross
By davidross
10th May 2022 10:06

..... and how does a 25 year old figure that is a figure (not a proportion) and has not been index linked compare with the present amount of profit that will be added on transition?

I would be fascinated to hear some examples

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Replying to davidross:
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By lionofludesch
10th May 2022 10:31

davidross wrote:

..... and how does a 25 year old figure that is a figure (not a proportion) and has not been index linked compare with the present amount of profit that will be added on transition?

I would be fascinated to hear some examples

Mine was slightly higher than the profits I made.

Which is why I crystalised the overlap relief.

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Replying to Ralph-gab:
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By Donald MacKenzie
09th May 2022 11:28

The idea of return dates being based on birthdays could work for sole traders, but falls over when you have a partnership, and partners have different birth dates.

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Replying to Donald MacKenzie:
RLI
By lionofludesch
09th May 2022 13:02

Donald MacKenzie wrote:

The idea of return dates being based on birthdays could work for sole traders, but falls over when you have a partnership, and partners have different birth dates.

Each person's share calculated according to his birthday. So you'd just need one set of accounts per partner per year.

Or - you could make partnerships only available to twins.

Thanks (4)
Replying to Ralph-gab:
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By Ralph-gab
10th May 2022 15:04

Oops yes, I'm a decade or so adrift!

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Replying to Ralph-gab:
RLI
By lionofludesch
10th May 2022 16:23

Tempus fugit.

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By Mallock
09th May 2022 10:40

I really don't believe these changes are designed for anything other than accelerating tax payments. Personally I have no problem with the principle and I know many of my clients don't either because they make regular payments throughout the year anyway.

MTD for VAT was fine because anyone registered for VAT has to make quarterly returns in any case but the extension to non VAT Registered businesses and landlords in particular is a massive imposition for some older clients. Just ask them to make a monthly payment of tax if that is the end aim.

We have also taken over the practice of an aging practitioner and all of his clients have 30th April year ends and there are no records of overlap relief, giving us a huge headache and a lot of calculations!

These changes are unnecessary and a huge burden on practitioners and small businesses and landlords.

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Replying to Mallock:
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By Donald MacKenzie
09th May 2022 11:26

I contacted HMRC about those clients I have taken on with year ends other than 31st March and they supplied me figures for overlap profits.

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Replying to Donald MacKenzie:
RLI
By lionofludesch
09th May 2022 12:19

Donald MacKenzie wrote:

I contacted HMRC about those clients I have taken on with year ends other than 31st March and they supplied me figures for overlap profits.

Yes. The simple option. I've never been told that they don't know.

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By North East Accountant
09th May 2022 11:02

Option 4

Stay on CYB.
Scrap MTD.
Qtrly payments on account based on last year....none in first year of trading.

Simple.

Thanks (5)
Replying to North East Accountant:
Morph
By kevinringer
09th May 2022 14:38

Simple and sensible.

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By Jane Wanless
09th May 2022 11:04

Our friends at HMRC should bear in mind that many businesses have year ends that have been chosen for sensible business reasons - eg seasonal business such as farmers, hospitality, entertainment etc. Changing the year end can end up with two or no peak periods being assessed. Stocktaking can cause issues if instead of a quiet period, it has to be carried out in the middle of lambing etc.
There's a lot to be said for a system that assesses a year's profits each year.

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By tedbuck
09th May 2022 12:19

I think we can live with the 31st March accounting date - so far overlap relief and SEISS have combined to make it a pretty harmless exercise.
It's the quarterly submissions and the insistence on DIGITAL that drives me to distraction. It really is total nonsense driven by mindless Civil Servants who don't have any experience of real life or dealing with real people.
Talking to a client the other day she mentioned that when she started in business she went down to the local Inland Revenue Office where a helpful officer showed her what to do. Can you imagine that today? No local office - no knowledgeable officer who could communicate with a taxpayer - little desire to be helpful.
As to digital information bridging the gap - a letter the other day from HMRC said that they hadn't been notified that a client had ceased trading. Well it said so on his tax return (digitally submitted) but presumably that isn't digital enough so what the chap was really saying was "We want it in writing." Says it all doesn't it?

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By Wendy Bradley
09th May 2022 13:19

Just curious where the quarter of a million affected taxpayers comes from: the TIIN said that “There are an estimated 528,000 sole traders and partners with non-tax year basis periods” https://www.gov.uk/government/publications/basis-period-reform/basis-per... although it also said “We estimate that this [increased admin burden from having to estimate profit figures & submit amended returns] will affect approximately 278,000 sole traders and partners.” Baffled: have emailed asking for a copy of the Sekrit Consultation..

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Replying to wendybradley:
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By lionofludesch
09th May 2022 13:22

wendybradley wrote:

Just curious where the quarter of a million affected taxpayers comes from: the TIIN said that “There are an estimated 528,000 sole traders and partners with non-tax year basis periods” https://www.gov.uk/government/publications/basis-period-reform/basis-per... although it also said “We estimate that this [increased admin burden from having to estimate profit figures & submit amended returns] will affect approximately 278,000 sole traders and partners.” Baffled: have emailed asking for a copy of the Sekrit Consultation..

If you have a year end early in the tax year, you'll still have time to prepare accounts, apportion them and file before 31st Jan.

If you've a December year end, maybe not.

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Morph
By kevinringer
09th May 2022 14:00

This can't be a mechanism for accelerating tax because their proposals to correct in the following year is, in effect, kind of what we have now. They're saying, that eg y/e 31/12/2029 correction for 2028-29 would be made in 2029-30, which is really what CYB is.

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Morph
By kevinringer
09th May 2022 14:03

For some of my seasonal trade clients, Easter has a massive impact on income, it being the start of the holiday season. The timing of Easter varies each year: sometimes in March, sometimes in April. Businesses with 31 March/5 April will have 2 Easters in 2028-29 followed by 0 in 2029-30, 1 in 2030-31 and 2 in 2031-32. The only way to ensure the business only has 1 Easter a year is to pick a financial year end that is not 31 March/5 April, which is the exact opposite to what HMRC want with basis period reform.

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Morph
By kevinringer
09th May 2022 14:24

HMRC sledge hammer to crack a nut that exists in HMRC's imagination only. I've looked through our partner clients. 37% of them do not have 31 March/5 April year end yet only 17% have overlap. That's because businesses often make losses in early years, especially with 100% AIA. In any case, the overlap is a one-off figure calculated in the early year of a business whereas the provisional figures will have to be estimated every year for the lifetime of the business. And provisional figures are only estimates. Estimates change as expectations change as the year progresses. Given that some tax can be backdated and interest charged, just how many times will be need to revise the estimates?

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Morph
By kevinringer
09th May 2022 14:25

HMRC's small difference proposal is measured at 5%. Small business profits fluctuate by more than 5%. I've dumped my clients Tax Return figures into a spreadsheet. Comparing 2020 with 2021, only 1.2% were within 5%. And they are actual figures.

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Morph
By kevinringer
09th May 2022 14:27

HMRC haven't got the resources to police this. Given that so many of my farming clients make a profit one year and a loss the next, I could estimate profit of £nil and correct it the following year under their proposals. In other words, keep the CYB in all but name.

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Morph
By kevinringer
09th May 2022 14:29

How is this going to work for partnerships? Most of my clients are partnerships. Who is going to be responsible for the estimate? The nominated partner? Will all partners be compelled to use that estimate? What happens if an individual partner disagrees with what the nominated partner estimates?

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Morph
By kevinringer
09th May 2022 14:32

Most of my clients are farmers. I submit loads of averaging claims. How is this going to work for averaging? What happens if the estimate is within the profit range for averaging, so averaging is claimed, but the final figures are outside, so the averaging has to be undone?

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Morph
By kevinringer
09th May 2022 14:33

[email protected] proposals are going to add 12 months to finalisation of the tax bill. Take for example y/e 31/12/2029. Currently that would be CYB for 2029-30. Final accounts would be submitted to HMRC by mid 2030, well before the deadline and well before the tax is payable. But under basis period reform I'd need to include 3/12th of y/e 31/12/2030. I'm not going to have the final figures until 2031. So I won't be able to finalise 2029-30 until 2031, 12 months later than currently.

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Replying to kevinringer:
By SteveHa
10th May 2022 08:45

And lest we forget, under normal SA rules the enquiry window is 12 months from the date of receipt of the Return, or 12 months from the date of amendment. If there is a requirement to correct the Return, HMRC have just bought themselves an extra 12 months.

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Replying to SteveHa:
RLI
By lionofludesch
10th May 2022 08:54

SteveHa wrote:

And lest we forget, under normal SA rules the enquiry window is 12 months from the date of receipt of the Return, or 12 months from the date of amendment. If there is a requirement to correct the Return, HMRC have just bought themselves an extra 12 months.

How many enquiries have you had in the last twenty years ?

I'm not seeing this as much of a risk.

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Replying to lionofludesch:
By SteveHa
10th May 2022 12:19

Perhaps HMRC simply couldn't fit them in within 12 months, but will be able to with an extra 12 months.

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Replying to SteveHa:
RLI
By lionofludesch
10th May 2022 16:22

SteveHa wrote:

Perhaps HMRC simply couldn't fit them in within 12 months, but will be able to with an extra 12 months.

They only need to start the enquiry within 12 months. How long can it take to write a letter?

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Replying to lionofludesch:
Morph
By kevinringer
11th May 2022 06:28

I agree it is not much of a risk because enquiries, like VAT inspections, seem to be a thing of the past. But there is a practical point: the huge lag between events and enquiry because the enquiry window will be extended by more than 12 months. Take 31 December year end. Let us suppose the accounts are finalised 5 months later. Under CYB y/e 31/12/2019 accounts would be all that is required for the 2019-20 Tax Return which is filed on 31/05/2020 thus the enquiry window ends 31/05/2021 = 29 months after the start of the accounting period that form the basis of 2029-30. But with basis period reform y/e 31/12/2029 is not all that is required for 2029-30, we also need 3 months of y/e 31/12/2030. Assuming accounts are still finalised 5 months after the year end, these accounts would be finalised 31/05/2031. It is at that point that the 2029-30 Tax Return is finalised. Because this 2029-30 Tax Return amendment is made after the filing deadline of 31/01/2031, the enquiry window is the end of the quarter 12 months after the amendment. That would be 31/07/2032. That means the enquiry window for 2029-30 won't close until 31/07/2032 which is 43 months after the start of the earliest accounting period that forms the basis of 2029-30. I agree the risk of HMRC actually launching an enquiry will be small, but image them interviewing a client about events so far in the past. Painful, and of limited value to HMRC. There is only one mention of enquiries in https://www.gov.uk/government/consultations/basis-period-reform/outcome/...

"Respondents also considered:
...
the impact on enquiry time limits"

And that's it. There's no mention of changes so I assume HMRC do not intend to make any. In which case, the enquiry should be restricted to what has changed, which will be just the 3 months of y/e 31/12/2030 that falls in 2029-30.

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Replying to lionofludesch:
Morph
By kevinringer
11th May 2022 06:28

I agree it is not much of a risk because enquiries, like VAT inspections, seem to be a thing of the past. But there is a practical point: the huge lag between events and enquiry because the enquiry window will be extended by more than 12 months. Take 31 December year end. Let us suppose the accounts are finalised 5 months later. Under CYB y/e 31/12/2019 accounts would be all that is required for the 2019-20 Tax Return which is filed on 31/05/2020 thus the enquiry window ends 31/05/2021 = 29 months after the start of the accounting period that form the basis of 2029-30. But with basis period reform y/e 31/12/2029 is not all that is required for 2029-30, we also need 3 months of y/e 31/12/2030. Assuming accounts are still finalised 5 months after the year end, these accounts would be finalised 31/05/2031. It is at that point that the 2029-30 Tax Return is finalised. Because this 2029-30 Tax Return amendment is made after the filing deadline of 31/01/2031, the enquiry window is the end of the quarter 12 months after the amendment. That would be 31/07/2032. That means the enquiry window for 2029-30 won't close until 31/07/2032 which is 43 months after the start of the earliest accounting period that forms the basis of 2029-30. I agree the risk of HMRC actually launching an enquiry will be small, but image them interviewing a client about events so far in the past. Painful, and of limited value to HMRC. There is only one mention of enquiries in https://www.gov.uk/government/consultations/basis-period-reform/outcome/...

"Respondents also considered:
...
the impact on enquiry time limits"

And that's it. There's no mention of changes so I assume HMRC do not intend to make any. In which case, the enquiry should be restricted to what has changed, which will be just the 3 months of y/e 31/12/2030 that falls in 2029-30.

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Replying to kevinringer:
RLI
By lionofludesch
11th May 2022 09:19

kevinringer wrote:
I agree the risk of HMRC actually launching an enquiry will be small, but image them interviewing a client about events so far in the past. Painful, and of limited value to HMRC.

Personally, I've found that can be a good thing. "I dunno, it's all a long time ago - if only you'd asked sooner" can be as good an answer as any.

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Replying to lionofludesch:
Morph
By kevinringer
11th May 2022 14:06

Excellent point. This could be very useful.

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Morph
By kevinringer
09th May 2022 14:34

How is this going to work for losses? And what about calculating income for pension contributions?

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Replying to kevinringer:
Ivor Windybottom
By Ivor Windybottom
09th May 2022 14:58

There is provision to exclude the "transitional income" from the calculation of total income for the purposes of calculating the Annual Allowance.

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Morph
By kevinringer
09th May 2022 14:37

HMRC want to reduce opportunities for tax planning but their proposals create the ability to backdate expenses to the previous tax year. Y/e 31/12/2029 would be part of 2029-30. Client estimates y/e 31/12/2030 profits to be £60,000 so need to bring 3/12th into 2029-30 = £15,000. Then on 31/12/2030 client buys equipment costing £60,000 reducing profit to £nil. In effect, client will get £15,000 AIA in 2029-30 even though the expenditure didn't occur until 9 months after the end of 2029-30.

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Replying to kevinringer:
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By Hugo Fair
09th May 2022 15:00

That's an impressive list, Kevin, and in terms of pertinent comments/questions not just the volume of them.

Let's hope that Rebecca is right when she says that HMRC will be reading all this!

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Replying to Hugo Fair:
Morph
By kevinringer
09th May 2022 15:59

Hugo, I had taken part in the consultation so HMRC had emailed me about the "easements". I've just sent them my response. 5566 words! My conclusion is the only easement that is worth doing is to retain CYB.

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RLI
By lionofludesch
09th May 2022 15:04

As usual, HMRC are "simplifying " things by making them hideously complex.

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By tedbuck
10th May 2022 10:11

I have been thinking about the world and its problems and came up with a surprising conclusion about similarities in totally different situations.

Someone who is autocratic and has an agenda which they intend to pursue what ever the cost to those affected.
Someone who won't listen to those who suggest that they may be headed in the wrong direction.
Someone who doesn't care in the slightest if people are badly affected by their actions.
Someone who will make them suffer if they don't do as they are told to do and if they don't will just grind them into the ground.
Someone who can do all this with someone else's money.

Makes you think doesn't it? At the end I couldn't decide whether it was Vladimir Putin or HMRC that I was cogitating about. Trouble is I am still not sure.

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Replying to tedbuck:
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By Hugo Fair
10th May 2022 10:57

Are you suggesting we impose sanctions on HMRC?

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By JoannaU
11th May 2022 12:22

It's not just the tax return / payments which are affected by moving everyone on to the same tax year basis - it is the process of completing the actual quarterly returns.

As most of my clients have the 31 March or 5 April year end, before the HMRC started talking about a TYB for everyone, I was actually contemplating asking roughly a third of my clients to change their year-end to 31 January and another third to 28 February, in order that the actual processing of the quarterly returns are spread over each month, rather than having most of them in one quarter's month. Unfortunately, with the TYB, the HMRC are going to scupper this as a simple solution.

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