Basis reform rules amended to help businesses

HMRC has released its response to feedback on proposals to reform the basis period accounting rules, making some amendments to the rules as a result

The reform’s implementation has been delayed by a year, meaning the transition to the new rules will take place in 2023 to 2024 and the new rules will come into force on 6 April 2024

There are a number of changes to the original proposals following feedback from accountants.

First, the government has decided to treat any excess profits arising during the transition year as a one-off separate item of taxable income, rather than as part of a business’s normal trading income. This treatment will minimise the impacts on allowances and means-tested benefits that were raised during the consultation.

There will also be an extension to the carry-back of loss relief arising due to excess overlap relief in the transition year from one to three years. This treatment will mirror the current rules for loss relief when a business ceases and provides greater flexibility around use of excess overlap relief.

Transition issues to be finalised

Finally, the government will explore carefully with stakeholders whether to introduce administrative or policy easements to minimise burdens caused by having to submit tax returns containing provisional figures, ahead of the transition year in 2023 to 2024.

The options being considered are:

• allowing taxpayers to amend a provisional figure at the same time as they file their return for the following tax year;
• allowing an extension of the filing deadline for some groups of taxpayers, such as more complex partnerships or seasonal trades;
• allowing taxpayers to include in the next year’s tax return any differences between provisional and actual figures in the previous year; and
• leaving the current rules on provisional figures unchanged, whereby profits can be estimated in a return and amended as soon as final figures become available.

One of the strongest criticisms was that accountants and tax agents did not have sufficient time to plan for the change and communicate the effect to clients. Many respondents asked for a one-year delay to the implementation of the reforms, which the government confirmed last month.

There were also concerns about the impact the reforms would have on certain sectors. Specifically, it was suggested that farmers, medical professionals and businesses with international connections would find it difficult to align their accounting date with the tax year, so would be forced to apportion their profits and in some cases, submit provisional figures. However, the final rules do not reflect any exemptions for partnerships.

A number of respondents highlighted the burden of submitting provisional figures in returns and then amending them at a later date. In particular, larger partnerships voiced their concerns in relation to the interaction between provisional figures and the process of deciding partner profit shares.

Paul Falvey, tax partner at BDO said: ‘Reform of the basis period is a complicated matter, it also could have increased the tax bills of many self-employed workers. The Finance Bill has announced important changes to the way in which the charge will be calculated which should ensure that the majority of those who receive tax allowances such as child benefit will not lose out.

‘If tax rates stay the same, the planned changes to basis periods should prove tax neutral for the majority of taxpayers who opt for spreading with no additional loss of allowances.

‘This is a common sense solution and shows that the government is listening to legitimate concerns. It is important that the government continues listening to taxpayers as there will still be more complexity and significant administrative challenges for the self-employed arising from the proposed reforms.’

Accountancy Daily