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Tax year basis transition: Get the details right

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Rebecca Cave has read the draft Finance Bill 2021/22 and consulted with HMRC and tax gurus to distil what you need to know about the transitional year: 2023/24. 

23rd Nov 2021
Tax Writer Taxwriter Ltd
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What is it?

From 6 April 2024 all unincorporated businesses – including partnerships – will have to report (for tax purposes only), their income and expenses as those amounts arise exactly within the tax year. This change is to facilitate MTD ITSA, although partnerships will not enter the MTD regime until 6 April 2025 at the earliest.

The business is not required to change its accounting period to the tax year (or near equivalent), but if it doesn’t, some apportionment of profits/ losses will be required from two sets of accounts, in order to complete the tax return, or end of period statement (EOPS). Accounting periods ending on a date between 31 March and 4 April are treated as if they end on 5 April, with income and expenses arising after the accounting period end allocated to the next tax year.

The transition to the tax year basis is the biggest upheaval in income tax assessment since 1995/96, when the 'prior year' basis was replaced by the 'from the current year' basis in order to facilitate self assessment.

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Replies (25)

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By GHarr497688
23rd Nov 2021 19:30

Thank god I will be out of it all. Really sorry for older tax payers caught up in this nightmare. Keeping records in digital format , changing the year end and filing forms six times a year! A few years ago HMRC were saying you could file three line accounts now you will need a degree in IT and Accounting/Taxation just to file a Pension and a Rental Income. Just awful.

Thanks (10)
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By Paul Crowley
23rd Nov 2021 20:55

As always
Much appreciated

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By Paul Crowley
23rd Nov 2021 21:01

"Why change?
HMRC insist that the tax year basis is critical to the operation of MTD ITSA. This came as a surprise to many in the tax profession as from November 2015, when MTD was first announced, until July 2021, there was no public discussion of the need to change income tax assessment to a tax year basis.

In evidence to the House of Lords Finance Bill committee, the HMRC spokesperson stated that without the change to the tax year basis the quarterly update figures would not provide a meaningful estimation of the tax due by the business for the year.

This is an odd justification, as the taxpayer’s tax liability for the year is not determined by the figures reported in the quarterly update. The tax liability is formed by the finalisation statement, which is not made up from the quarterly updates."

A good commentry
If essential for MTD, why did it take so long for HMRC to figure out that most critical issue?
But noted that only HMRC think that way. No IT developer saw any problem

Thanks (6)
Replying to Paul Crowley:
RLI
By lionofludesch
24th Nov 2021 09:40

Paul Crowley wrote:

"Why change?
HMRC insist that the tax year basis is critical to the operation of MTD ITSA. This came as a surprise to many in the tax profession as from November 2015, when MTD was first announced, until July 2021, there was no public discussion of the need to change income tax assessment to a tax year basis.

In evidence to the House of Lords Finance Bill committee, the HMRC spokesperson stated that without the change to the tax year basis the quarterly update figures would not provide a meaningful estimation of the tax due by the business for the year.

This is an odd justification, as the taxpayer’s tax liability for the year is not determined by the figures reported in the quarterly update. The tax liability is formed by the finalisation statement, which is not made up from the quarterly updates."

A good commentry
If essential for MTD, why did it take so long for HMRC to figure out that most critical issue?
But noted that only HMRC think that way. No IT developer saw any problem

It's not essential, is it ?

If we're just worried about tax estimates, the estimate could easily be based on the existing accounting year end. December, June, October, whatever ....

And that little freedom would've softened, if not eliminated, one of the biggest problems of MTD - the bunching of work into four peak periods in the year.

Folk are talking about the four day working week. Accountants will soon be considering the four month working year.

Thanks (3)
Replying to Paul Crowley:
By SteveHa
24th Nov 2021 10:19

One has to wonder how a business with a Y/E of 28 February will be able to aggregate income for two years, where one of those aggregates is for a year that will not yet have accounts prepared.

Thanks (1)
Replying to SteveHa:
RLI
By lionofludesch
24th Nov 2021 10:29

SteveHa wrote:

One has to wonder how a business with a Y/E of 28 February will be able to aggregate income for two years, where one of those aggregates is for a year that will not yet have accounts prepared.

Estimate and amend.

It'd be much more sensible to produce interim accounts for a month but, apparently, that's not permitted.

Thanks (1)
Replying to lionofludesch:
By ireallyshouldknowthisbut
24th Nov 2021 10:50

it seems to me this change is clear evidence that the "tax estimates" are merely a smokescreen.

Its clearly going to be "tax payments" in the none too distant future but don't want to announce that yet. We have already seen the 'consultation' to this effect go through.

But of course there is no reason at all the quarterly "tax payments" cant be based on the prior years figures as they are now. The payments on account regime is slightly messy when clients bounce in and out, but well understood by tax payers and agents.

Thanks (5)
Replying to ireallyshouldknowthisbut:
RLI
By lionofludesch
24th Nov 2021 10:52

ireallyshouldknowthisbut wrote:

it seems to me this change is clear evidence that the "tax estimates" are merely a smokescreen.

Of course they are.

From the outset, it was obvious that they could never be sufficiently accurate to be of use.

Thanks (4)
ghm
By TaxTeddy
24th Nov 2021 08:32

In all the doom & gloom, the reference to George & Mildred made me smile. My brother interviewed Brian Murphy for BBC radio and said what a lovely man he is.

Thanks (1)
By ireallyshouldknowthisbut
24th Nov 2021 10:45

Connected to this, if a client has currently (say) an April 2020 year end, they could of course extend their period to 18 months in 2020/21 to bring this through to October 2020 and thus close the gap.

However they cant then do this again to bring it in line with March 2024 as you can only do this once within 5 years unless its for "commercial reasons"

Are HMRC going to really stick with that, or allow businesses to bring their year round to alignment in this transitional period?

I have not seen this point debated. Whilst for some clients the transitional arrangements might be preferable, for others the simplicity with a 2 or 3 years of extended year ends might work, for example for clients for whom year end timing doesn't really matter but is an historical accident. Not least as it would be much simpler to explain to the client and avoid a long tail of transitional arrangements which are likely to come and trip people up for years to come.

Thanks (2)
Replying to ireallyshouldknowthisbut:
RLI
By lionofludesch
24th Nov 2021 13:52

ireallyshouldknowthisbut wrote:

Connected to this, if a client has currently (say) an April 2020 year end, they could of course extend their period to 18 months in 2020/21 to bring this through to October 2020 and thus close the gap.

However they cant then do this again to bring it in line with March 2024 as you can only do this once within 5 years unless its for "commercial reasons"

Are HMRC going to really stick with that, or allow businesses to bring their year round to alignment in this transitional period?

I have not seen this point debated. Whilst for some clients the transitional arrangements might be preferable, for others the simplicity with a 2 or 3 years of extended year ends might work, for example for clients for whom year end timing doesn't really matter but is an historical accident. Not least as it would be much simpler to explain to the client and avoid a long tail of transitional arrangements which are likely to come and trip people up for years to come.

I've always been of the opinion that HMRC wouldn't object to you extending the period to 5th April - because that's what they wanted.

Folk may like to consider extending now, or next year, effectively getting an extra year into the spreading of the excess profits but it'd be very much on a case by case basis. There's not going to be any overarching "right answer" here.

Thanks (0)
Replying to ireallyshouldknowthisbut:
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By Ardeninian
24th Nov 2021 14:21

You could do something along the lines of what you suggest, because the commercial reasons rule (and indeed the 18 month rule) are immaterial for 2023/24 - the basis period runs to 5 April 2024 regardless.

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By petestar1969
24th Nov 2021 10:44

Only unincorporated businesses? So doesn't include LLP's?

If so, I foresee a lot of LLPs being formed in the next year or so......

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By raycad
24th Nov 2021 11:06

It'll take me the rest of this week (minimum) to get my head around all the permutations. But just a small editing note, Rebecca. Muriel seems to have infiltrated her way into Ben's scenario at Example 2!

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Replying to raycad:
rebecca cave
By Rebecca Cave
24th Nov 2021 13:49

Corrected the stray Muriel.

Thanks (2)
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By johnjenkins
24th Nov 2021 11:06

I don't know how many remember but this was discussed at the beginning of SA. As the idea was to tax business in the year 6/4 to 5/4. It was decided that business should have whatever year end they chose so a transitional relief was set up. In those days HMRC had a bit of respect for Accountants and their views. So now HMRC are short of dosh so the transitional relief will be replaced with a much higher profit figure. No doubt some business will make a loss in the transitional year.
Why HMRC keep coming out with this load of bull, considering nobody believes a word they say, (purely because we have proved them wrong on every facet of MTD) astonishes me. I suppose it's one of those brainwashing exercises "every day in every way I'm getting better and better" twitch twitch Cloo... aaaaah. (For the younger generation Pink Panther)

Thanks (4)
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By NeilW
24th Nov 2021 11:12

It's way past time that the peculiar way self employed are treated was scrapped, and they should be taxed as though incorporated by guarantee.

PAYE for personal drawings, and then corporation tax on remaining profits.

One set of rules for personal income and one for business income.

Thanks (1)
Replying to NeilW:
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By johnjenkins
24th Nov 2021 12:32

How so?
SE
Income less expenses = profit.
Profit less CA = taxable profit.
Ltd
Income less expenses = profit
Profit less CA = taxable profit.
The only difference is a person has a tax free allowance, a business hasn't.
Let's not forget the obvious, personal drawings might be part loan repaid.

Thanks (1)
Replying to NeilW:
RLI
By lionofludesch
24th Nov 2021 13:59

NeilW wrote:

It's way past time that the peculiar way self employed are treated was scrapped, and they should be taxed as though incorporated by guarantee.

PAYE for personal drawings, and then corporation tax on remaining profits.

One set of rules for personal income and one for business income.

No offence, but - Rubbish.

Thanks (5)
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By DMBAcc
24th Nov 2021 12:29

Well I have found a very friendly local bookkeeper who is going to take all my simple sole traders off my hands. Most of these clients are friends so I am eternally grateful. As for me I can draw my pension on 1 October 2023 - GUESS WHAT I WILL BE DOING.
It beggars belief as to what is happening - shambollick is far too mild for this. One wonders how HMRC collect ANY taxes given the level of incompetence throughout the whole organisation.
Does anyone still TRUST this bunch of expletives?
I feel so sorry for those stuck in this nightmare. This will only get worse as they try to introduce patches when the proverbial hits the fan.
I think the time for civil disobedience has arrived. HM Treasury have had their own way for far too long and we have a bunch of selfish, indifferent numskulls as MPs who don't understand any of this.
Chief among the culprits is George Osborne former MP who should be made to face the music for introducing this to Parliament. Only the House of Lords seem to have grasped the urgency and severity of this mommentus $£%^up.

Thanks (4)
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By seitler
24th Nov 2021 12:44

Do we know what will happen if overlap relief is not known ? can it be estimated ?

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Replying to seitler:
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By lionofludesch
24th Nov 2021 14:12

seitler wrote:

Do we know what will happen if overlap relief is not known ? can it be estimated ?

Ask HMRC. They know.

If they say they don't know, ask again.

They've never, ever failed for me.

But, if it does turn out that you keep making contact with the more gormless haporths, ask for details of profits and assessments in the opening years or around 1995-97. You can work it out from those.

Or just wing it and stick in any number you like. If they don't know, they won't dispute it. If they do know, you can always point out that you asked but they lied to you and said they didn't know. A reasonable excuse if ever I saw one.

Start asking now. There'll be a fair few folk asking in the next few years.

Thanks (4)
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By adjadj
24th Nov 2021 12:56

A couple of logic flaws in the tax estimate justification

1) If you want to estimate something you take a sample. HMRC did this to justify MTD. The MTD benefits were assessed on a sample (which from memory) was a thousand of so people. So why does HMRC need to see the revenue of every tax payer in order to estimate the tax due?

2) I expect that many people will take decisions on exceptional expenditure (pension contributions come to mind) towards the end of their accounting year. If most people move to the same tax year then the estimates based on Q1, Q2 and Q3 will look very different from that based on Q4!

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By Open all hours
24th Nov 2021 15:05

Thank you Rebecca.
Can’t help but ask is this really the sort of thing you wanted to deal with when you embarked on your career? I suspect not.
As stated elsewhere surely the time is coming when we have to take action to show the strength of feeling against this nightmare inspired by nothing other than this prime example of dangerous group think from civil servants we were warned of elsewhere this week.
First off I think we need to agree 3 questions which we want Mr Harra to answer to our satisfaction before he tackles any other subject in Coventry next week.
How does quarterly reporting help small businesses?
What evidence is there that the accountancy profession is being taken seriously in the MTD debate?
Why hasn’t HMRC marketed MTD direct to the businesses which will be affected?
These are from the top of the head, other suggestions more than welcome, but we don’t have long.

Thanks (3)
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By tedbuck
24th Nov 2021 15:15

Thanks Rebecca,

I have ordered an ice pack!

The sad thing about this is the complete indifference of HMRC to the problems involved.

Reaction from people I have spoken to is unanimous - they will leave it to their accountants to deal with. Problem, of course, is that the accountants won't have the time (or inclination) to do this so what will the poor taxpayer do? HMRC's online systems are not the easiest to manage nor are they always effective so if Mr Taxpayer has to struggle with this himself he will make a botch of it more likely than not. So the quarterly submissions will be rubbish and as one of your commentators put it 'all the pensions etc go into the last quarter' so guessing tax on the basis of submissions will be somewhat subjective.
I am with GHarr - thank goodness I will be out of it.
Perhaps HMRC should save the money being thrown against the wall on MTDfITSA and use it to collect the £42billion tax debts which they seem to have overlooked.
Still that would suggest a modicum of intelligence a factor lacking in the management of HMRC these days.
One little story for your general amusement - an aquaintance's girl friend has just got a job with HMRC. Total novice - no experience - so she is asked to work from home!! Oh dear she says - I have no computer. Never mind says HMRC we'll get you one but it will take about a week but we'll pay you while you are waiting.
Nice thought. Not their money so why worry - what about GDPR? How do they protect the information on all these WFH computers. But the concept of training an HMRC worker remotely at home leaves me to feel that HMRC are truly off their heads.
I think I agree with the comment about HMRC workers and MPs all having a deficit of marbles and agree that George Osborne should be hung drawn and quartered for the total chaos he has caused but I don't doubt it was really the Treasury behind it all so perhaps we should have a new subject for November 5th.

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