There has been criticism from accountants concerning the government’s proposed reforms to the basis period for taxation, with the sector denouncing the changes as ‘costly and complicated’ for SMEs. The IFA and its members have also voiced concerns that seasonal businesses could be hardest hit, explains Anne Davis, Director of Professional Standards for the Institute of Financial Accountants (IFA).

The consultation, released by HMRC in July 2021, proposes that for the self-employed, partnerships and LLPs, the basis of taxation should change from the current year basis to what will be termed an earnings basis, or tax year basis.

This will first address the tax year in question, and then time-apportion the accounts so that profits attributable to that tax year are taxed in that tax year. For example, a business with a 30 April 2023 year-end would take 1/12th of these profits for the tax year 2022/23, and 11/12ths of the profits for the year to 30 April 2024 to determine the taxable profit for 2023/24.

RSM tax partner Tim Parr noted HMRC’s proposals change the rules “so that tax on increasing profits is paid earlier … whilst this change has no effect for businesses with stable profits, there will be earlier payment of tax where profits are rising”. He said while HMRC says this “offers the prospect of simpler tax administration for many businesses, for others the proposed change brings an additional administrative burden which threatens to be both costly and complicated”.

‘Downtime’ businesses to bear brunt 

More than 90% of IFA members agree there would be additional costs to clients where an apportionment of profits between tax years is required, with the average cost per client estimated to be £200 to £500 per year – although nearly a quarter of members estimated extra costs would be £500 to £1,000 per year.

Businesses with November or December year-ends will be one of the hardest hit – many seasonal businesses and industries such as farming, tourism and construction tend to have year-ends in months when trade will not be so busy, so that they can “better deal with admin”. So, there are good reasons why businesses have chosen their accounting reporting periods.

Members suggested that HMRC could: adopt 31 December as the tax year to align with most other countries, change the accounting period now before the next filing date; continue with the current once-a-year filing until the new systems are debugged; or delay future plans for Making Tax Digital (MTD) for income tax. Around 15% would advise clients to ‘review the structure of their business and possibly incorporate the business’.

Almost half of IFA members would prefer no change in basis periods at all, although some felt the change to the tax year basis should be optional and not mandatory.

The IFA’s “significant concerns”

Anne Davis commented: “The IFA supports the modernisation and digitalisation of the tax system, however we have some significant concerns. For instance, we are not sure how the change in basis period will fit into the overall timetable announced in July 2020 for MTD which includes extending VAT to all VAT-registered businesses from April 2022 and quarterly income tax reporting from April 2023 for MTD ITSA. Corporation tax MTD is still to be consulted.

“While IFA members are largely behind the change to the tax year basis, there are a number of significant concerns and in the detailed responses to the specific questions. The roadmap for MTD detailed above will mean that many more SMEs will be within the scope of MTD than before. These businesses will require help and support with the transition.

“There is no detailed timetable of MTD ITSA and how the proposed changes in the basis period will be implemented. We strongly urge HMRC to consult on this further before proceeding further. Specifically on the changes on the basis period reforms, while this is largely supported by IFA members, we are concerned that seasonal businesses will find it difficult to prepare accounts during their busy season. These businesses have often deliberately chosen an accounting period end that allows them to bring together their accounts when their businesses are less busy.

“Apportionment of profits to different tax years is something most IFA members would want to avoid, as it creates an additional cost for the business with no benefit. Guidance from HMRC would be required on how to do this.”

Further detail from the IFA membership response can be found by clicking here.