Basis period reform

16 September 2021

Chris Holmes and Frances Edwards in our London Tax Group authored “Basis period reform: a simplification with complications”, published by Tax Journal on 9 September 2021.

The government is proposing to reform the income tax basis period system for unincorporated businesses by moving from the current year basis to a tax year basis, with 2022/23 being the transitional year. For each tax year, the profits to be assessed will then be those arising during that year. It is proposed that any excess tax charge arising in the transitional year can be paid over five years.

While this simplifies some aspects of the current regime (such as the opening and closing year rules, and overlap relief rules), it would introduce some new complications (including apportioning profits for businesses that do not adopt a 31 March year end, which is likely to be a particular problem for large international professional firms). Businesses will face practical and commercial issues, and many detailed matters remain to be addressed.

The article includes sections on:

  • The current year basis: a refresher on the existing position‘
  • Tax year basis: what’s proposed
  • What can we expect?
  • Where is the position less clear?
  • Practical impacts
  • Where does this leave us?

Basis period reform would appear to be an inevitability as it is closely linked to the full implementation of MTD. HMRC did actively engage with the profession during the consultation period, and most professional firms have a vested interest in this issue. However, as is sometimes the case, there were some clear policy decisions behind the proposals that are unlikely to change (such as the transition to a tax year basis), but HMRC was open to discuss the wider matters, such as how to get there and how to reduce the administration burden for those taxpayers most affected.

Ultimately the aim of the proposals is simplification, fairness and advancing the effective payment date of tax.

In most cases, these objectives will be achieved, but the proposed use of estimates will, for some, increase complexity and administration, and thus negate the main stated aim of simplification. We now must await the consultation response and revised draft legislation to assess the true impact on unincorporated businesses.

For more information, or for assistance, please contact Chris Holmes or Frances Edwards.