Consultation in respect of basis periods

HMRC released a consultation on basis periods on 20 July 2021.

Although we would perhaps not normally provide details of HMRC consultations,  there is draft legislation published, and we would expect full legislation to follow in due course, as this consultation is all part of HMRC’s policy of moving towards Making Tax Digital.

It may be that this could have cash flow implications for your businesses and therefore needs to be kept under review as the consultation and eventual legislation is finalized.

The consultation is in respect of a specific proposition to simplify how businesses are taxed in their early years, by removing the “current-year basis”, and replacing it with a “tax-year basis”.

This would impact on all individuals, partnerships, and trusts with a non-March year-end accounting period for any work as a proprietor of a business, from 2023/24. The proposition is that there would be a transitional year in 2022/23.

The impact would be as follows:

  • All profits will be taxed in the tax year in which they are made. This means that if the accounting year-end is 30 September 2023, the 2023/24 tax returns would be based on 6 months of the period ending on 30 September 2023 and 6 months of the period ending on 30 September 2024.
  • If final accounts for this second period were not available before 31 January, an estimated return would need to be completed and submitted to HMRC before this date, and then amended after this date.
  • In 2022/23 a long period would be taxed from the end of the previous accounting period to 31 March 2023. All existing overlap relief would then be claimed against this, in order to reduce the profits to those of a 12-month period. For example, if the year-end was 30 June, the period taxed in 2022/23 would be 1 July 2021 – 31 March 2023. All overlap relief brought forward would then be claimed.
  • If this gave rise to additional profits, i.e. if overlap were lower than the additional profits taxed in the year, this could be spread over 5 years.

There remain many areas where HMRC are still looking into the impact of these changes, and so subtle changes may be made.

HMRC have requested views from businesses, their advisers, and other interested parties. The consultation can be found here

If you would like to discuss this, please feel free to contact us. Further updates will be published once available.

For more information about our services and how we can help your business please get in touch.
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