Basis Period Reform

For those sole traders and partnerships whose accounting year-end is the 31 March or 5 April each year, the basis period rules are unlikely to be the source of any concern; but for those with a year-end elsewhere in the calendar, they can cause issues. Due to a shift from the Julian to the Gregorian calendar in England in 1752, and the need to compensate the landlords for the consequential lost 11 days, our tax year-end is the 5 April. Any business which runs its year-end beyond 31 March or 5 April (which are regarded by HMRC effectively as one and the same), will have an element of their profits taxed twice in order to bring their accounts into step with the tax year. These ‘overlap profits’ are not lost entirely, but the double taxation cannot be relieved until the business ceases, or the year-end is changed – neither of which are exactly regular occurrences.

The government has launched a consultation concerning (and placed into the draft Finance Bill 2021/22) plans to align basis periods for unincorporated business with the tax year. The background to all this is less about the issues with traders’ overlap profits, but more to do with the government’s wanting to mandate Making Tax Digital (MTD) for all businesses and individuals with an income of more than £10,000 by April 2023. One of the preludes to this is to simplify the basis period rules.

The plan is to replace the ‘current year’ basis with the ‘tax year’ basis. This would not force businesses to change year-end of their accounts, but the quarterly tax reporting requirements for property and trading income would assess those profits arising in the tax year. This would begin in April 2023, along with the MTD rollout, with a transition year in 2022/23 whereby all basis periods would run to 5 April 2023 and overlap profits being relieved.

The Association of Tax Technicians has welcomed the news in principle but urged the government to allow an extra year both for the transition year and the MTD roll out given the upheaval such changes will cause. They have also called for the consultation deadline to be extended by another month.

The consultation runs from 20 July 2021 to 31 August 2021.