HM Revenue & Customs (HMRC) have released their 'Consultation outcome: Basis period reform'. The responses cover the proposed changes to the basis period rules which affect unincorporated businesses. The proposal to align the tax and accounting years for unincorporated businesses will be included in Finance Bill 2022.

The Consultation responses are summarised as follows:

  • It was recognised that the policy was intended to simplify the taxation of trading profits which was welcomed.
  • Concerns were raised about the proposed reform being introduced too quickly. Concerns included causing short term complications, the bunching of accounting work and additional costs. HMRC have announced a delay and the provisions will now be introduced from 2024-25 with 2023-24 being the transitional year. 
  • The suggested transitional provisions were seen by the majority of respondents as the fairest and simplest way to transition to the tax year basis.
  • The proposals to spread excess profits were viewed as largely mitigating the impacts of the transitional provisions however that it could lead to higher tax charges (as a result of the loss of personal allowances or pushing taxpayers in to higher tax brackets) was seen as unfair.
  • The burden of any changes is likely to be felt by particular sectors including, farmers, medical professionals, partnerships and as a consequence their accountants.

Next steps

  • The reform will be postponed for a year. The new basis period rules will apply from 6 April 2024 and the year of transition will be the 2023-24 tax year.
  • The legislation will be included in Finance Bill 2022 to provide details of the changes well in advance of their introduction.
  • The government will treat any excess profits arising in the year of transition as a one-off separate item of taxable income. This will minimise the impacts on allowances and means-tested benefits.
  • The time period for the carryback of losses in the case of excess overlap relief will be extended from one to three years.
  • The government will explore whether to introduce administrative easements when submitting tax returns with provisional figures ahead of the transitional year. The options being considered, on which stakeholder feedback will be sought, include:
    • Allowing provisional figures to be amended when filing the tax return for the following year.
    • Allowing extended filing deadlines for certain taxpayer groups.
    • Allowing differences between actual and provisional figures to be included in the following year's tax returns.

Useful guides on this topic

Accounting periods and tax basis periods
Which date do I choose? Does it matter? Can I change my accounting date? What changes are proposed as a result of the reform of basis periods?

Consultation: Income Tax Basis Period reform
HMRC have published a new consultation ‘Basis period reform’ alongside a policy paper and draft legislation that propose a simplification of the Income Tax rules for the self-employed by allocating trading profit to tax years regardless of the business’ accounting period end date.

Basis period reform: What could it mean for MTD?
Proposed changes to the basis period rules, which are currently being consulted on, could result in some self-employed businesses being mandated into Making Tax Digital for Income Tax sooner than expected.

Call for evidence: Basis Period Reform
The House of Commons' Finance Bill Sub-Committee has issued a call for evidence seeking views on the draft legislation published in Finance Bill 2022 for the Reform of Basis Periods and the Uncertain Tax Treatment provisions.

External Links

Consultation outcome: Basis period reform

Consultation: Basis period reform

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