Introduction

The Northern Ireland Tax Committee of Chartered Accountants Ireland is pleased to have the opportunity to comment on the consultation “Basis period reform”, which was launched on 20 July 2021. Information about Chartered Accountants Ireland and the Northern Ireland Tax Committee is provided on the previous page.

We would be happy to discuss any aspect of this submission and to participate in any further consultations/initiatives in this area as this project develops.

The Institute and this Committee both recognise the importance of this consultation and, as such, sought feedback from our wide membership base in compiling this submission. Despite reaching out to our members, it is clear that a longer period to respond to this consultation would have been helpful. The comments herein are therefore made in the context of the short timescale to respond.

A copy of this submission has also been sent to the Right Honourable Jesse Norman MP, Financial Secretary to the Treasury, due to the concerns we have in respect of this consultation and the Making Tax Digital project.

Consultation process

Although potential reform of the basis period rules was referred to in “The tax administration framework: Supporting a 21st century tax system Call for evidence” (“TAF”), this was only briefly referenced and was presented therein as an example of “a simplification opportunity”. It was therefore surprising that this consultation was published at stages 2. and 3., together with draft legislation, so soon (just one week) after the TAF Call for evidence closing date of 13 July 2021. This simply could not have afforded the Government sufficient time to consider any responses to the very brief coverage of this important topic in that consultation.

This consultation, the first formal consultation for this major change, was also only six weeks in length – half of the 12-week period for consultation set out in “The new Budget timetable and the tax policy making process”, which reaffirmed the UK Government’s commitment to the principles set out in “Tax policy making: a new approach”, first published in 2010.

The consultation was also poorly timed as it coincided with the UK’s summer holiday season when many stakeholders were taking a well-earned break. Stakeholders simply have not had enough time to provide feedback. In addition, the consultation was accompanied by draft legislation which, according to Section 3.2 of “The new Budget timetable and the tax policy making process”, should have been afforded a minimum of eight weeks for stakeholders to provide commentary.

This consultation is both a second and third stage consultation wrapped up together. Normally these stages come separately after the policy objectives, including any case for change, and the different options to achieve it have been set out at stage 1. A formal stage 1. consultation therefore appears to have been skipped entirely.

Although the current consultation does briefly suggest some alternatives to the tax year basis, it is clear from the consultation that a move to tax year basis is the Government’s preferred option and this is also the only option reflected in the draft legislation. It is disappointing therefore that stage 1. of the consultation process was not followed – in effect the Government’s proposals have arrived almost fully formed for stakeholders to comment on.

It is also worrying that the Government “will consider whether to publish a summary of responses”. This is an important consultation and with the proposed changes due to impact in just over six-months’ time (2022/23 being the proposed transitional year); from a transparency perspective we strongly recommend that the Government publishes a summary of responses.

According to the consultation’s Executive Summary, the Government “engaged with a cross-section of stakeholders representing a wide range and size of businesses, in a variety of sectors, in order to establish initial impacts and is now seeking detailed views on the proposal.”

No further information has been provided in the consultation in respect of this engagement. The lack of transparency around this particular workstream is disappointing. We would therefore welcome clarification in respect of who the discussions took place with and when, what was discussed and the views of those stakeholders.

As a Professional Body representing almost 5,000 members in Northern Ireland, two thirds of whom are working in businesses, with the remaining one third working in the practices representing many of the businesses which these changes will impact on, it would have been helpful to have been included in these initial discussions. Chartered Accountants Ireland also has approximately 1,500 members on the UK mainland.

The consultation also states that in 2014 the Office of Tax Simplification (“OTS”) recommended “simplifying basis periods”. However the report cited in support of this was an interim report on the OTS’s review of partnerships. That report said “there is a need to review further the complexities caused in opening years by basis periods and overlap relief to assess whether a simpler method of giving overlap relief would be sensible, fairer and appropriate. (This would also be relevant for sole traders.)”.

Nowhere did that report state that the basis period rules more generally should be reformed. Instead, the report also said that “tax returns for partnerships can be simplified by simplifying basis periods for non-trading income for partnerships, probably by being able to sweep small amounts of interest or property income into trading income.”

We note also that the consultation’s summary of impacts was not fully completed. When a consultation is at draft legislation stage a fully completed summary of impacts should accompany this. The brief summary of impacts which has been included states that “no other impacts have been identified”. This is surprising as we would have expected to see the following costs for businesses (which do not prepare their accounts to 31 March/5 April) included in the summary of impacts:-

• The cost of preparing two sets of accounts for each tax year;
• The additional cost arising from have to provide estimates where the accounting period ends later in the tax year;
• The requirement to amend prior year tax returns on an ongoing basis;
• The cost of calculating unused overlap relief;
• The additional costs arising from the transitional year including assessing the potential benefit of the smoothing election.

We recommend that the cost of each of these is considered and included when completing the summary of impacts at the next stage of this consultation.

The consultation does recognise that the current proposals to move to tax year basis are significantly different to the proposals included in the 2016 consultation “Simplifying tax for unincorporated businesses.”

Overall, we are concerned that basis period reform is being rushed through and we are disappointed that the normal consultation process is not being followed.

However, this is not a new concern. We have noted an emerging pattern from the consultation process in recent years that often stage 1. is skipped and less and less time is being provided to respond to key consultations.

Our submissions in respect of several recent consultations have raised the same issues and concerns with the consultation process. See “Making Tax Digital: Corporation Tax”, “Raising standards in the tax advice market: professional indemnity insurance and defining tax advice” and “Call for evidence: timely payment” as just some examples where we have previously expressed these concerns.

As many businesses have only recently reopened for the first time since December 2020 and numerous are still not back to trading at full capacity, the key principles of the UK Government’s approach to tax policy making of predictability, stability and certainty are even more vital as the UK seeks economic recovery and growth over the coming years post pandemic and EU exit.

It seems that the haste of this particular consultation and the abandonment of the Government’s own consultation process has been driven by the desire to implement these changes before Making Tax Digital for income tax self-assessment (“MTD ITSA”) becomes mandatory from April 2023.

Although this would seem sensible, it does not mean that a consultation on such an important change should not be rushed, especially considering the ongoing review by the OTS of potentially moving the end of the tax year.

For all of the above reasons more consultation time is therefore needed to examine basis period reform in more detail. This would also enable the interaction of basis period reform with other areas such as capital allowances, losses, payments on account etc., as set out at Section 3.3, to be considered in tandem, whilst also examining any proposals to change the end of the tax year.

We therefore recommend that the commencement date for basis period reform be deferred a minimum of at least one year to allow a longer period for consultation on this important issue and related matters. This would also necessitate MTD for ITSA to also be delayed at least one year which we examine in more detail later.

General points

The current consultation refers to “businesses making many thousands of tax return errors every year” and “more than half of businesses affected by this complexity do not claim the relief they are entitled to”. No further information is provided in respect of the specific types of errors being made and it is not clear what relief (overlap relief?) businesses are not claiming. A deep dive in respect of these errors could provide more insight into what specific aspects of the basis period rules are most in need of reform.

Although the proposal to tax businesses on profits arising in the tax year itself appears sensible and would simplify matters for many unincorporated businesses, including the end of overlap relief, we remain to be convinced of the need for this wholesale change given the huge complexities which would arise on a continuing basis for businesses not preparing accounts to 31 March/5 April.

Feedback from our members tells us that although the rules in opening years are more complex, including the rules for overlap relief, the rules are still well understood despite their complexity. This complexity also falls away once a business has moved beyond the opening year rules and onto the current year basis. This matches feedback from the OTS in its 2016 review of partnerships (see earlier).

The basis period rules are therefore generally seen as well understood in respect of ongoing businesses and enable businesses to clearly plan for and identify their tax liability in advance of the self-assessment filing and payment deadline.

Although we can see why the Government wishes to reform the basis period rules in advance of the introduction of MTD ITSA, as this would align the quarters for reporting trading and property income, we have concerns in respect of how this would impact on the bunching and scheduling of work for accountants. We return to this in more detail later.

Overall, the proposed change of basis period from current year basis to tax year basis would largely go unnoticed by businesses that use an accounting date of 31 March/5 April but will be very problematic for businesses that use a different accounting date, particularly one later in the tax year.

Speed of implementation and change

The proposals are currently scheduled to commence in 2022/23, with that year being a transition year, ahead of full implementation from 2023/24 onwards and legislation proposed to be included in Finance Bill 2022.

However the transitional year of change to basis periods is due to take effect in the same tax year as the introduction of MTD for VAT in April 2022 for unincorporated VAT registered businesses with turnover less than £85,000 and just one year before MTD ITSA is due to commence in April 2023. These are already huge changes for unincorporated businesses when also coupled with the new points based penalty regime also due to come into operation from April 2022.

Basis period reform cannot solely be looked at in isolation. As the consultation recognises, there are also numerous areas of interaction which must also be considered which the current consultation has not examined.

The impact of all of this cumulative change and the capacity of businesses, agents and HMRC to deal with this needs to be very carefully considered. We are particularly concerned about the capacity for, and sequencing of, this change, given the potential change to the tax year end is also currently under review by the OTS. The pace of change may overwhelm many businesses, agents and HMRC if this is hastily introduced.

At recent Representative Body Steering Group meetings, the Professional Bodies continue to express concerns in respect of HMRC customer services levels and it is worrying that major reforms are pressing ahead whilst business as usual and basic processes continue to suffer from long delays.

Our members are also reporting to us severe resource constraints in the professional services market which have not been experienced for many years. Job vacancies are at a record high and a recent report by the Financial Services Skills Commission “Skills for future success” states that almost a third of employers across the financial, professional and business services sector are struggling to recruit due to widespread skills shortages, with thousands of critical roles remaining unfilled.

Non-31 March/5 April accounting period ends

The change to a tax year basis period would make no real difference to unincorporated businesses which already have a 31 March/5 April accounting period end. However for those with other accounting period ends, the planned changes are very significant and would introduce complexity on an annual basis which would not ever go away. This would be even more challenging for those businesses when MTD ITSA commences.

As recognised in the consultation, this will be particularly challenging where the accounting date is towards the end of the tax year. Businesses would have to allocate profits of an accounting period to tax years and would need to do so each year, bringing significant additional complexity where there previously was not any.

For example, when moving to the tax year basis, a business with an accounting period ending 30 June 2023 would include 3/12ths of the tax adjusted trading result from those accounts in 2023/2024 plus 9/12ths from the next accounting period ending 30 June 2024.

As the consultation recognises, this will also lead to the need for significant estimations for these businesses.

By way of another example, when moving to the tax year basis, a business with an accounting period ending 31 December 2023 would include 9/12ths of the tax adjusted trading result from those accounts in 2023/2024 in addition to 3/12ths from the next accounting period ending 31 December 2024. The accounts for 31 December 2024 would be unlikely to be finalised in time to file the 2023/24 return by 31 January 2025 (assuming the self-assessment filing date remains the same).

Such businesses will therefore not be able to determine and finalise their tax liability for a particular tax year until they have prepared and finalised two years accounts. From a commercial perspective, this is will lead to uncertainty for many businesses and will break the link between a particular set of accounts and the business’ tax liability making it very difficult to plan ahead strategically and financially.

When the second accounting period is finalised, this will only close and finalise the tax liability for the previous year leading to an amended self-assessment needing to be filed at additional work and cost for the business, agent and HMRC. The business will also not know its tax liability for the next tax year until the next set of accounts is completed.

This will be a recurring problem each year and will be of particular impact for large partnerships many of which prepare accounts to 31 December due to tax rules in other countries.

Although HMRC is not asking businesses to change their accounting date, in reality it seems likely that many businesses will feel forced to change their accounting date to 31 March/5 April to ensure they are able to plan for and have certainty in respect of their tax liability for a particular year without the need to use potentially inaccurate estimates.

Businesses should be able to choose the accounting period end which best suits them and which is based on commercial needs and objectives, not tax reasons. The consultation itself does recognise this but makes little comment on how businesses may be forced to change their accounting period end. For this reason we would also not be supportive of making it mandatory for businesses to use 31 March/5 April. Unincorporated businesses should not be treated any differently to companies which already have the freedom to choose their accounting period end.

Estimates

Section 3.13 of the consultation suggests several alternative approaches to estimation which could be explored in order to manage the need for estimates by businesses with accounting periods ending later in the tax year. Our comments on each of these are set out below.

Basing estimates on MTD ITSA quarterly updates

Using these updates to arrive at estimations of the tax adjusted trading result on which the business would then pay income tax and Class 4 NIC and also file its self-assessment would not be suitable for several reasons.

Linking MTD quarterly reports to the calculation of estimated taxable profits as part of a self-assessment tax return would result in very challenging practical difficulties. For many businesses, the year-end tax process of finalising the annual accounts, recognising annual reliefs, allowances (including capital allowances), deductions, and other claims and elections results in a final tax liability which very often looks completely different to the estimated results of the business based solely on their quarterly filings.

The complexity of UK income tax legislation also means that ITSA is an annual tax. To compare the outcome from the year-end tax process to that which arises under quarterly reporting is simply not a valid comparison. For many taxpayers, their final tax position and the tax liability of a particular tax year can only be accurately assessed on an annual basis once they have the whole picture and after the relevant year-end accounts have been prepared in accordance with UK GAAP. The estimated information potentially generated under MTD will simply not be sufficiently accurate to provide reliable estimates.

The benefits of MTD were also never intended for this; the Government’s MTD policy objective is to reduce errors as a result of improved, more frequent digital record-keeping.

Extrapolation of profits during the ‘known’ part of the tax year

This would not be suitable for seasonal businesses and could result in a high level of distortion between the estimated figure used based on the tax adjusted trading result from the known part of the year compared to the actual final results once the accounts have been completed.

Allowing the final figures to be provided as part of the next tax return

This would seem to be a sensible approach at the outset. However it does not make sense from a commercial perspective for a business to file a self-assessment return part of which is estimated only.

The requirement for estimation will also lead to tax returns having to be amended by those businesses on an annual basis. This would be costly both for the business, their agent and HMRC.

Businesses would also not have the certainty needed over their tax liabilities and in particular, where a refund is due in respect of the previous tax year, this could cause unnecessary cash flow difficulties where there is a delay in HMRC processing and issuing the relevant refund. The Exchequer would also be facing a level of uncertainty over tax receipts on a yearly basis.

The penalty and interest position for under-reporting of profits in the previous tax year where a business must use estimates due to its accounting period end will also need to be considered as on a strict basis, this could be classed as an error in a self-assessment return.

Transitional rule and spreading election

For non-31 March/5 April accounting period ends, the change to tax-year basis may mean a significant additional income tax and Class 4 NIC bill will arise for some businesses in respect of the transitional profits not taxed in the previous tax year which are taxed in the transitional year. The consultation sets out examples of this in Annexe B.

Although the impact of this can be reduced by overlap relief, businesses may find that these additional profits are not significantly reduced by overlap relief because overlap profits were minimal in the opening years (as the business was in start-up) especially where business profits have grown significantly since then.

Businesses/agents also may no longer have a record of the relevant overlap profits available for overlap relief as this may date from many years ago and also may not have been passed on where there has been a change of tax agent.

Should the basis period rules move to a new basis, HMRC should commit to providing the figures for available overlap relief to businesses and agents so that the impact of having to include additional profits in the transition year is minimised.

The consultation notes that “a significant number of traders report overlap relief brought forward despite having a 5 April accounting date, which should be impossible”. It is not clear if HMRC have checked this to their records or not; it is possible that overlap profits may have arisen previously when such businesses had a different accounting date.

The transitional provisions do provide for the spreading of transition-period profits over five tax years, starting with 2022/23. However, for many businesses this carries the risk of spreading these profits into tax years where the income tax and Class 4 NIC rates increase meaning higher tax bills for these businesses than they would have paid had they continued to be taxed on the current year basis.

This means that despite the opportunity to elect to spread transition period profits, some businesses will be facing higher tax liabilities simply because of their accounting period end which seems unfair.

The impact of these additional profits on how payments on account of income tax and Class 4 NIC will be calculated in the transitional year and any years into which they are spread also needs to be addressed.

From a cash flow perspective, this consideration is a vital one for businesses. As these profits would not have been taken into consideration in 2022/23 but for it being a transitional year, i.e. they are a one-off adjustment, we would suggest that HMRC consider not factoring these into the calculation of payments on account.

HMRC has also recently consulted on real time tax payments for income tax and corporation tax. It would therefore now seem apparent that aligning profits the with the tax-year when combined with MTD ITSA reporting (see the next section for more detail) clearly shows that the Government is keen to move to real time tax payments. Our response to the “Call for evidence: timely payment” sets out our reservations on these proposals.

Overall, we make a number of recommendations to minimise the impact of the transition year:-

• The transition year should commence in 2023/24 at the earliest and not 2022/23 – this would mean MTD ITSA should not then commence until April 2024, again at the earliest;
• If a business decides not to enter into a spreading election and instead agrees a Time to Pay with HMRC, there should be no late payment interest in respect of the additional tax and NIC arising from these additional profits;
• HMRC should consider allowing businesses the option of calculating the additional tax and Class 4 NIC which would have arisen had the additional profits been taxed under the current year basis – this could then be spread over five tax years; and
• To minimise the impact of potentially higher income tax and NIC rate where a business chooses to elect for spreading, HMRC could introduce a form of averaging election for the additional transition profits, similar to that available to farmers.

Link to Making Tax Digital

We note the publication in July 2021 of the report “Impact of Making Tax Digital for VAT” which looks at the extent to which MTD for VAT is achieving its objectives including reducing errors. It is not clear to us that this report is solid proof that MTD for VAT is doing so and the true picture is really only likely to emerge when up to date VAT gap data is published later this year.

We also remain concerned that the £10,000 turnover limit for MTD ITSA is simply not workable, fair nor feasible to expect the smallest businesses, whose taxable profits may be such that they are not required to pay any tax, to maintain digital records and report information quarterly.

Although the MTD ITSA regulations are expected to be laid later this year with the final ministerial decision on the starting date rules still pending, this consultation is clearly indicative that the Government wishes to introduce basis period reform in advance of the introduction of MTD ITSA in April 2023.

The interaction of this consultation with the commencement rules for MTD ITSA has the potential therefore to have a significant knock-on impact on the MTD ITSA start date for unincorporated businesses.

The current draft MTD ITSA regulations provide for a start date falling on the first accounting period starting on/after 6 April in the relevant tax year. As MTD ITSA is due to commence from 6 April 2023, but for the basis period reform proposals, this would have meant the following start dates for businesses with differing accounting period ends:-

As a result, this would have provided businesses and tax agents with some time to prepare for these significant changes. Tax agents in particular would also have had to the opportunity to on-board clients into MTD ITSA over a period of almost a year.

However, should the basis period move to a tax-year basis, all businesses will be required to join MTD ITSA from 6 April 2023, with the deadline for the first quarterly updates for all businesses and landlords being 5 August 2023. This effectively brings forward the MTD start date for many businesses by almost a full year which would put considerable strain on businesses, agents and HMRC, in particular on HMRC helplines which are already under pressure.

All unincorporated businesses would also be required to report under MTD ITSA for the same quarters and by the same deadlines with the final update also due to be filed by the same date. This would create a significant bunching of workload for tax agents which would be further exacerbated if businesses decided to also change their VAT stagger group to align with the MTD ITSA calendar quarters. As set out earlier, there is currently a severe professional skills shortage in the UK; requiring all unincorporated businesses to be ready by April 2023 would be extremely challenging.

The start date of MTD ITSA is therefore potentially just over 18 months away for all unincorporated businesses. Furthermore, businesses which have availed of COVID-19 supports are not able to join the MTD ITSA trial until Spring 2022 at the earliest. This is just one year before we expect mandation of MTD ITSA and means that many businesses who choose to take part in the trial will not have gone through a full cycle of filing MTD updates, including filing the final update before they are mandated to do so. Some of those businesses will also be mandated into MTD for VAT from April 2022 and will therefore already be dealing with significant change.

An unexpected consequence of moving the basis period to tax year basis would therefore bring all businesses within MTD ITSA on the same date. As set out earlier and for the above reasons, HMRC should therefore delay the introduction of MTD ITSA by at least one year. This would also allow for further consultation on basis period reform.

Proposals should also be considered to ensure businesses are not all mandated to join MTD ITSA from the same date, nor should they all having the same filing deadlines. This could be achieved by considering other options for basis period reform such as the corporation tax like approach which we discuss in more detail later.

A corporation tax-like approach

Another option for reform set out in the consultation would be to use a system based on the current rules for corporation tax (“CT”), where payment and return dates are linked to a business’s accounting period end.

This option could be explored in more detail including the potential to provide overlap relief for existing businesses if changeover to a CT-like system were to take place. We do not see why overlap relief could not be provided by moving to a CT-like approach if it would be provided by moving to a tax-year basis approach.

A CT-like system would mean a business would be able to clearly link its accounts to its final tax liability and it would remove the need for estimations by businesses with accounting periods ending later in the calendar year which would arise under the tax-year basis approach.

The consultation sets out that this option “would require process and IT changes to the current annual self-assessment system which would be likely to take many years to implement with very significant disruption and cost”.

It is not clear, unless this option is explored in more detail, why this would take many years to implement and how there would be such disruption and cost. MTD ITSA is doing this in any case and HMRC already have a self-assessment system in place for corporation tax.

Moving to this basis would also mean no transitional period would be required and it would have a smoothing effect by removing the annual ITSA peak pressures – this would benefit agents, businesses and HMRC alike. In addition, businesses would not all have the same MTD filing deadlines which would result in less bunching of work for all stakeholders as a result of this smoothing effect.

For example, if unincorporated businesses were moved to this basis after the tax year 2022/23 i.e. when MTD ITSA is currently scheduled to commence, a business with an accounting period ending 30 April 2022 would be taxed under the old rules in 2022/23 as normal and they would then move to the new basis period in respect of the accounting period ending 30 April 2023 with no taxable profits falling to be taxed earlier or later.

Conclusion

We look forward to engaging in further consultation in future on this matter. In the meantime, in the context of the foregoing, as a minimum, we believe that the following key recommendations merit serious consideration: -

1. Given all the current upheaval for businesses and the clear need for more detailed consultation on basis period reform, reform of the basis period rules should be delayed by at least one year i.e. commence this on a transitional basis no earlier than 2023/24 and not in 2022/23.
   This is especially important in the context of the OTS review of moving the tax year end, the TAF Call for evidence and other major consultations which have recently taken place as it makes sense for any such changes to be coordinated. It will also allow for additional time to consider the various interactions of basis period reform with other areas of the tax system.
   It is vital that the design and implementation of basis period reform is fully considered and not rushed if it is going to work for businesses and HMRC alike. Commencing these changes in just six months’ time just to suit the timetable for MTD ITSA is simply not feasible;
2. For the reasons set out earlier, the roll-out of MTD ITSA should also be delayed by at least one year to 2024/25. This will also allow time for any basis period reform to be further consulted on and only then introduced;
3. The potential to move to a CT like system should be explored in more detail; and
4. A detailed roadmap leading up to the proposed introduction of basis period reform should be developed and published.

Regardless of whether the one-year recommended delay is implemented, it is essential for HMRC to provide a clear indication of the steps towards implementation of basis period changes between now and their introduction. Businesses and their advisers must be able to identify the relevant issues which need to be considered, including any potential change in accounting period end, in order to prepare for and manage the changes efficiently and effectively.