Switch to tax year basis to go ahead in 2024
by Rebecca Cave
Despite the delay to Making Tax Digital for income tax self assessment, unincorporated businesses will have to report their results on the tax year basis from 2024/25 onwards, breaking the tenuous link.
Making Tax Digital for income tax self assessment (MTD ITSA) has been delayed for at least two years – and more for partnerships – but all unincorporated businesses will have to report their accounting results on the tax year basis from 2024/25 onwards.
The only justification HMRC has put forward for basis period reform – the switch to reporting accounting figures by tax year rather than by accounting period – is that it will make the estimated tax liability reflected back to the taxpayer, after each MTD quarterly update, more relevant. This assumption has yet to be proven.
By pushing ahead with the tax year basis now, the tenuous link with MTD is broken.
However, HMRC’s view is that not mirroring the MTD delay for the basis period reform is a good thing, as businesses and tax agents now have at least two more years to adjust to the tax year basis before getting to grips with MTD ITSA.
Provisional figures
Businesses that will not, or cannot, change their accounting period to align with the tax year, will have to apportion figures from two accounting periods to report taxable profit on each tax return from 2023/24 onwards. If the accounts for the later of those two periods have not been finalised by the tax return submission date, provisional or estimated figures will have to be used.
HMRC has decided to deal with the issue of provisional or estimated accounting figures in a way that imposes the greatest burden on those businesses. They will need to submit each tax return twice, first including the initial estimated figures from the later accounting period, and secondly with the finalisation of those figures.
HMRC has now advised that the update of the tax return figures can be done at the same time as the next year’s tax return is submitted. However, this means that the business will not have certainty about its tax liability for an additional year, which in turn will feed to uncertainty around pension contributions, set-off of losses and so on.
Overlap relief
Where a taxpayer commenced their trade using an accounting period that was not aligned to the tax year, they may have experienced some double taxation of those initial profits. The amount that was double taxed is referred to as overlap profits. It can be set off, as overlap relief, when the accounting period end is altered, or against the profits bunched into 2023/24.
Some businesses that run their accounts to a date other than 5 April or 31 March, may have been advised to align their accounts to the tax year from 2021/22, or indeed from 2022/23.
HMRC has now confirmed to the Chartered Institute of Taxation (CIOT) that it will be able to provide details of overlap relief figures or historic profit figures on request, if these figures are recorded in HMRC systems [my emphasis]. Taxpayers should ring the HMRC self-assessment helpline and agents should ring the Agent Dedicated Line if they need this information to complete a 2021/22 tax return.
HMRC is planning to set up a different system to provide the figures of overlap relief to be used in the tax calculations for 2022/23 and 2023/24, and it has asked tax agents to be patient about requesting these figures until the new system is ready.
When will HMRC tell taxpayers?
The transition year for the switch to the tax year basis starts in less than three months on 6 April 2023, but HMRC does not appear to have a communications plan for the basis period reform in place.
In the update shared with the CIOT, HMRC said it is looking at “providing specific and detailed support to help these individuals complete their tax returns for the transition tax year.”
I would respectfully suggest that this support to unrepresented taxpayers needs to move up a gear, and soon. Taxpayers with a 30 April year end will be expecting to report their income and expenses for the period 1 May 2022 to 30 April 2023 on their 2023/24 tax return, but as that year is the transition year they will need to report their income for the period from 1 May 2022 to 5 April 2024.
This extra profit will affect the amount of tax payable for 2023/24, and the amount that needs to be paid as on account payments on 31 January 2024 and 31 July 2024.