Digital tax reform proposals affecting self-employed going ‘full speed ahead’

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However, the professional body is warning that businesses may not be prepared for the government’s changes, which the CIOT referred to as being at “full speed ahead”.

Published yesterday, the draft legislation reveals the government’s plans to reform the current ‘basis period’ rules.

‘Basis period’ rules refer to how trading income for smaller businesses, such as self-employed sole traders and partnerships is decided to tax years.

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Notably, the proposal outlines the government’s plan to change how this is decided so it will be based on profits or losses which arise during the tax year.

As of this moment in time, the allocation is determined based on the accounting period ending in the tax year.

When describing the new policy’s objective, the government said: “The overall objective of the proposal is to simplify the taxation of trading profits. This is in line with stakeholder requests to simplify this part of the tax system.

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“The current year basis requires a set of rules to cover all eventualities. After the transition year in 2022 to 2023, the tax year basis would require much simpler rules to cater for the taxation of businesses.”

Going forward, the new ‘tax year basis’ will start from the year 2022-23 to prepare for the start of MTDl for income tax self-assessment, which is currently set to happen in April 2023.

Furthermore, legislation will be introduced as part of the reform to officially name March 31 as equivalent to 5 April.

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This means that businesses which draw up their accounts to March 31 will no longer have to make up apportionments of a few days to determine their profits or losses for a particular tax year.

While this usually occurs in practice, this will be the first time it will be on a statutory footing.

Pete Miller, the Chair of the CIOT’s Owner Managed Business Committee, praised the reforms but noted the difficulty it posed to businesses due to the speed it was being implemented.

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“This is a welcome simplification of the current system which has been with us in one shape or form since the 1920s, but we are concerned about the speed at which it is being introduced and whether there will be enough time for businesses to absorb the impact of the change on their individual circumstances and take action to avoid any adverse or unforeseen consequences,” he said.

“We are also concerned that the government consultation on this reform is inadequate.”

He added: “Six weeks during the holiday season, in the middle of a pandemic, is not sufficient for tax professionals and others to assess the detail of this significant change, how it will affect them and their clients, and provide constructive feedback to government on it.”

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In particular, Miller noted that the proposed change will not impact the majority of businesses which use either April 5 or March 31 as their accounting date, but will instead introduce further complexity.

Miller explained: “The main driver for reforming basis period rules is MTD. This proposal is intended to reduce the number of quarterly submission dates from at least 13 a year to eight, reducing the compliance burdens on most businesses, and we welcome that. But we are concerned at the very tight timeframe in which the changes will take place.

“We have been highlighting for years that MTD could mean some taxpayers facing significant burdens as a result of having to make multiple quarterly updates to HMRC each year depending on their individual circumstances, and whilst it is pleasing to see the government address this, it is regrettable that it seems to be being done at the 11th hour, with little time for ironing out any problems which emerge.”

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The CIOT believes that making March 31 equivalent to April 5 will lead to those who are self-employed following the rules for MTD for ITSA going forward from their next accounting period.

This period will begin on or after April 1, 2023, rather than April 6, 2023.

Currently, self-employed businesses affected by the reforms will have to submit quarterly reports which align with calendar quarters.

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“Ultimately, we would have preferred the start date for MTD for ITSA to be deferred in order to accommodate a more thorough consultation process and give businesses more time to absorb the impact of the change in the basis period rules before they transition into the MTD regime,” Miller said.

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