HMRC has started a new consultation for ‘Basis period reform’ which will run for 6 weeks from 20 July 2021 to 31 August 2021. This reform to the tax system will make it easier for small businesses to fill out their tax returns.
‘Basis period’ reform are changes from ‘current year basis’ to ‘tax year basis’. This is a part of simplifying the tax system. The overall objective of the proposal is to simplify the taxation of trading profits. The change aligns with the government’s plans to provide self-employed business owners with a more modern, digital, integrated service through the implementation of Making Tax Digital (MTD) for Income Tax. This will help reduce errors and ensure self-employed businesses get their tax right first time. Also, it will allow self-employed people to spend less time doing tax admin and more time growing their business and creating jobs.
Generally, businesses prepare annual year end accounts to their ‘accounting date’ which is usually the profit or loss for the year up to the accounting date in the tax year, called the ‘basis period’. Specific rules determine the basis period in certain cases, including during the early years of trading. These rules can create overlapping basis periods, which charge tax on profits twice and generate corresponding ‘overlap relief’ which is usually given on cessation of the business. Overall, this basis of taxation is called the ‘current year basis’.
The proposal changes this to a ‘tax year basis’ with effect from 2023 to 2024, so that a business’s profit or loss for a tax year is the profit or loss arising in the tax year itself, regardless of its accounting date. Currently tax year end in the UK is 5 April (or deems year end 31 March).
There will be a transition period in 2022-2023 when all businesses require their basis period moved to the end of the tax year (5 April or 31 March) and overlap relief will be given.
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NAZALI TAX & LEGAL |