Basis Period Reform

There are proposed changes to the basis period for Making Tax Digital rules that under discussion currently, which could result in some self-employed businesses being mandated into Making Tax Digital for Income Tax.

Making Tax Digital for Income Tax

Based on the current draft regulations, Making Tax Digital for Income Tax Self Assessment (MTD ITSA) will as compulsory, apply for accounting periods starting on or after 6 April 2023.

• An existing Property business owner or trader with a 5 April year-end, would join Making Tax Digital ITSA on 6 April 2023, this being the first accounting period starting on or after 6 April 2023.
• An existing trader with a 31 March year-end would join MTD ITSA on 1 April 2024, this being the first accounting period starting on or after 6 April 2023.

Consultation: basis period reform

HMRC recently published a Consultation, policy paper and draft legislation proposal.  It outlines a simplification of the Income Tax rules for the self-employed by allocating trading profit to tax years, regardless of the business’ accounting period end date.

• This will apply from 2023-24.
• There will be a transition period in 2022-23.
• Accounting periods that end between 31 March and 4 April inclusive will be treated as ending on 5 April.
• In the 2022-23 transition year, business profits will be reported from the end of the previous period and assessed in 2021-22 up to 5 April 2023.
  • Businesses with a 31 March 2023 accounting date will report business profits up to that date. This will be deemed to be 5 April 2023.
  • The subsequent accounting period will be deemed to start on 6 April 2023.

The Impact on Making Tax Digital ITSA

If the reforms go ahead, existing traders with a 31 March accounting period end could be mandated into Making Tax Digital ITSA a year earlier than expected. MTD ITSA would apply from 6 April 2023, rather than 1 April 2024.

For a trader with a 31 March year-end:

• Profits for 1 April 2022 to 31 March 2023 will be reported in 2022-23.
• Profits for 1 April 2023 to 31 March 2024 will be reported in 2023-24.
  • This is deemed to be 6 April 2023 to 5 April 2024 for tax purposes.
  • Being the first accounting period starting on or after 6 April 2023, Making Tax Digital ITSA will apply from the quarter beginning 6 April 2023.

This impact is not limited to traders with an accounting period ending on 31 March. Under the draft regulations, traders would have expected to join MTD ITSA at different dates depending on their accounting end date, for example:

• Accounting date 30 June: Making Tax Digital ITSA starts from 1 July 2023.
• Accounting date 30 September: Making Tax Digital ITSA starts from 1 October 2023.
• Accounting date 31 December: Making Tax Digital ITSA starts from 1 January 2024.

In all cases, under the basis period reform, as currently proposed, the MTD ITSA start date is likely to be 6 April 2023.

If you have any questions or queries on the above, or would like to know how you can manage the changes, Speak to the Robinsons Team