Consultation outcome

Summary of responses

Updated 4 November 2021

1. Introduction

Background to the consultation

The government intends to simplify the way self-employment income is taxed by reforming the complex rules on ‘basis periods’ which determine how profits are split between tax years. Under the current rules, taxable self-employment income for a tax year is the taxable profit from a set of accounts ending on a date in that tax year.

The government proposes to change this so that self-employment income for a tax year is the amount of income arising in the tax year, regardless of a business’s choice of accounting date. This would align the rules for self-employment income with other types of income, such as property and investment income.

This reform was suggested as a simplification opportunity in the government’s call for evidence The tax administration framework: supporting a 21st century tax system published on 23 March 2021.

To test the feasibility of the idea, the government then held a short informal consultation involving 27 meetings over a 3-week period in June 2021, with a range of businesses and tax experts. This suggested that while the overall reform would make the tax system clearer and easier to understand for the great majority of businesses, it would generate extra burdens for some. The government decided to carry out a formal consultation over the summer to identify the wider impacts of the proposed reform and to seek views on how to minimise any extra administrative burdens.

On 20 July 2021, HMRC issued a consultation document asking for views on how best to implement the proposal to simplify the basis period rules. The consultation sought views on the detailed policy as well as which businesses were likely to be most affected by the proposal, what benefits it was likely to bring and how best to minimise the potential downsides.

Summary of responses

This document sets out a summary of responses received in respect of the consultation.

The government held 13 meetings involving over 300 people and received 117 written responses from businesses, individuals and representative agents and bodies. The general tone of the consultation was constructive and helpful, with many respondents making detailed comments on interactions of the proposed reform with other areas of the tax system.

There was an overall recognition of HMRC’s policy intention to simplify the taxation of trading profits and most respondents agreed that the reform was a simplification for the great majority of businesses affected. However, many respondents thought that the proposed reform would make tax administration more complicated and expensive for them and that the reform was being introduced too quickly. A number of respondents also made points about Making Tax Digital.

A number of specific concerns were also raised. These included:

• agents not having sufficient time to plan for the change and communicate the effect of the change to clients. Many respondents asked for a one-year delay to the implementation of the reforms
• the impact the reforms would have on certain sectors. Specifically, it was suggested that farmers, medical professionals and businesses with international connections would find it difficult to align their accounting date with the tax year, so would be forced to apportion their profits and in some cases, submit provisional figures
• the burden of submitting provisional figures in returns and then amending them at a later date was flagged as a concern by a number of respondents. In particular, larger partnerships voiced their concerns in relation to the interaction between provisional figures and the process of deciding partner profit shares
• apportionment of profits into tax years was also flagged as an additional burden, although not a significant one

We are grateful to all those with whom we discussed the proposal and those that submitted responses, recognising the time and effort that went into them. The responses and external discussions have helped HMRC to understand respondents’ views and concerns, as well as the potential impacts of the proposal.

The government has listened carefully to the views expressed in the consultation and on 23 September 2021 announced its intention to postpone by one year the reform of basis periods and the introduction of Making Tax Digital for Income Tax Self Assessment. This means the new basis period rules will apply from 2024 to 2025, with a transition year in 2023 to 2024.

The detailed legislation for the rules will be introduced in Finance Bill 2021 to 2022 in order to provide certainty of the changes well in advance of transition. This will give businesses, agents and software providers more certainty about the proposed changes so they can prepare for them.

The government has also developed some proposed changes to the detail of the reform in light of the responses received during the consultation. These are set out in the ‘next steps’ chapter of this document.

The following chapters set out the responses received to the specific questions asked in the consultation and outlines how the government proposes to take forward the reform of basis periods. Annex A is a list of respondents.

2. Responses

This chapter summarises the responses to the 11 questions asked in the consultation.

Proposal: The tax year basis

Question 1: Do you think that the proposed ‘tax year basis’ for trading income is the best option for simplifying the basis period rules, and the best way to achieve simplicity and fairness between businesses?

There were 109 responses to this question.

Broadly, the views of respondents were split between taxpayers, accountants/agents, complex partnerships and representatives of taxpayers with seasonal trades.

The majority of taxpayers welcomed the proposals. They argued that the current basis periods rules and the mechanism for overlap relief are overcomplicated. This group broadly agreed that the reform would significantly simplify the tax system for them.

Respondents in the accountants/agents group broadly supported the principle behind the reform, although voiced concerns over the close proximity of the transition year and the bunching of work that the proposals would cause. Some accountancy representative bodies expressed concerns that the proposals were being rushed.

Complex partnerships generally concluded that the reforms were positive in principle but would be difficult to accommodate in practice. Respondents in this group broadly felt that they would be more adversely affected in comparison to other businesses because of the administrative burdens of submitting provisional figures and apportionment, in particular when calculating the remuneration of partners.

Representatives of taxpayers with seasonal trades highlighted that the proposals would adversely affect them through the additional administrative burdens of submitting/amending provisional figures in returns and apportionment. These businesses tend to use an accounting date not aligned with the tax year for commercial reasons, so would be unlikely to change dates.

If not, do you think there is a better option?

There were 40 responses to this question.

The most commonly suggested options were maintaining the current system of basis periods and overlap relief, carving out certain businesses from the proposals (in particular large and complex partnerships, businesses that are seasonal, and businesses that have international connections), increasing the spreading period from 5 to 10 years, extending the filing deadline to the end of the tax year and delaying the transition year to 2023 to 2024.

Other less common suggestions included grandfathering overlap relief by changing the opening year rules so that new businesses do not suffer from overlap and mandating tax year accounting dates (5 April or 31 March) for all unincorporated businesses.

Question 2: Will the proposed tax year basis have an effect on how businesses choose their accounting date, and whether they choose 31 March or 5 April?

There were 67 responses to this question.

As a whole, respondents to this question stated that the proposed tax year basis would have a direct impact on how businesses choose their accounting date, with the majority believing that a 31 March year end would be adopted. This was welcomed by many small businesses as a means to simplify the tax system and make it more understandable for the unrepresented.

Respondents in the accountancy field mostly agreed that they would encourage their clients to move to a 31 March accounting date for simplicity reasons. Others expressed concerns over bunching of work and suggested that the proposal may create an unwanted distortion of accounting dates being selected for tax administration reasons.

Respondents representing large and complex partnerships, seasonal trades (such as farming) and businesses with international connections expressed concerns that their business areas would not be able to change their accounting date, so would be adversely affected by the proposals because of their need to submit provisional figures in returns and apportion their profits.

Question 3: For businesses with a non-tax year accounting date, what would be the cost of the additional administrative burden of apportioning profits into tax years? Are there any simpler alternative approaches to apportionment?

There were 61 responses to this question.

Respondents to this question expressed concerns that businesses with a non-tax year accounting date will inevitably have to spend more time when filing a tax return. Respondents also agreed that it would be difficult to put an exact cost on the effect of apportionment as it would fluctuate in relation to a business’s individual circumstances, as well as the capability of their accounting software. Some accountancy firms stated that the costs associated with the reforms would be passed onto their clients.

The most commonly suggested alternative approaches to apportionment included delaying the filing deadline to the end of the tax year to give more time to calculate apportioned figures and for HMRC to adopt a light touch approach to interest and penalties in relation to the accuracy of apportionments.

Question 4a: Businesses with accounting dates later in the tax year will have to estimate profits for a proportion of the tax year, before accounts are prepared. For which accounting dates do you think this would be necessary? Do you expect that businesses that have accounting dates earlier in the tax year than 30 September will have to estimate profits? If so, which types of business would be affected?

There were 55 responses to this question.

Respondents were split in their views on the accounting dates which would require some element of estimation when calculating profits for the tax year and submitting provisional figures in returns. Some respondents claimed that all businesses with non-tax year accounting dates would need to submit provisional figures for some element of their profits, whereas others suggested that submitting provisional figures in returns would only be necessary for businesses with accounting dates from 30 September onwards. Respondents were unanimous in suggesting that businesses with a 31 December year end would be affected the most.

Large partnerships wholly agreed that some form of provisional figures would be required when calculating the taxable profits of their partners, regardless of their non-tax-year accounting date. Other complex and international businesses with accounting dates earlier than 30 September were also flagged as types of businesses that may specifically be affected and have to submit provisional figures.

Question 4b: Will estimation be a significant burden for those businesses affected, and what will the cost be? Are there any simpler alternative methods of estimating profit or finalising estimates, which could mitigate any extra administrative burden?

There were 55 responses to this question.

The majority of respondents stated that estimating profits for provisional figures would be a significant burden for businesses. Others claimed that an accurate estimate of profits could be reasonably quick to calculate. A common view was that the need to file amended returns was where much of the complexity and burden would arise. Large partnerships stressed the increased burden they would face in light of their need to estimate their own, and their partners’ profits, in order to submit provisional figures.

The majority of respondents in the accountancy profession expressed concerns around the additional costs that estimating provisional figures would bring and highlighted that these costs would probably be passed onto their clients. It was difficult for respondents in this field to accurately quantify this cost, although some claimed that their client’s fees would be doubled as a result. Multiple respondents commented on HMRC’s approach to penalties and interest in relation to estimates and felt that some leeway should be given in the accuracy required by HMRC.

A series of respondents suggested that the administration burden could be mitigated if HMRC allowed adjustments to provisional figures in the following years’ tax return. Some respondents also suggested extending the filing deadline to the end of the tax year.

The government recognises the additional administration burden that accompanies provisional figures and outlines how it intends to take the proposals forward in the ‘next steps’ chapter of this document.

Question 5: Would the proposed equivalence of 31 March to 5 April help businesses that would have to make apportionments to work out their profit or loss under the tax year basis? Would extending this equivalence to property income help property businesses, which would otherwise have to apportion profit or loss each year? Are there any problems with this equivalence proposal?

There were 44 responses to this question.

Respondents agreed that the proposed equivalence of 31 March to 5 April is a sensible, long-overdue proposal, which would help businesses who need to make apportionments. Respondents also agreed that extending the proposed equivalence to property income would promote consistency and simplicity for affected businesses by aligning accounting periods and quarterly obligations. The effect equivalence would have for those using the cash basis in terms of allowing flexibility in reporting profits/liabilities was also raised.

Some respondents drew attention to the Office of Tax Simplification’s review of the tax year end date and noted that any potential benefits of equivalence could be nullified depending on the result of the review.

Question 6: Are there any specific issues, costs, or benefits to the tax year basis for partners in trading partnerships?

There were 48 responses to this question.

Individuals and accountants who do not represent partnerships did not offer any comment on the way in which the proposal would affect partnerships.

Partnerships and representatives of partnerships were keen to highlight that the proposals would cause them specific issues. Respondents in this group noted that partnerships who do not account to the tax year would face large administrative burdens when apportioning their profits and also when estimating and amending their partners’ provisional figures.

Respondents also highlighted that a partner’s share of the partnership’s profits would commonly not be finalised until after a remuneration board or similar had sat. The date on which remuneration boards sit can vary considerably so this process could, in some cases, make estimations for provisional figures difficult to do. International partnerships were also noted as a particular area of concern when considering the burden of calculating Double Taxation Relief (DTR) and overseas overlap relief.

Question 7: Are there any other issues and interactions to consider for the tax year basis, or the transition, in the areas of tax outlined in paragraph 3.33?

There were 51 responses to this question.

The most commonly suggested issues and interactions to consider were on personal allowances, tax rate bands, pensions, the creation of losses in the transition year, farmers averaging and DTR. Less commonly suggested interactions included student loan repayments, high income child benefit charges, universal credit, capital allowances, payments on account and means tested benefits. The government has noted these areas of concern and outlines how it intends to take the proposals forward in the ‘next steps’ chapter of this document. Implementation and transition

Question 8a: Does the proposed method of transitioning to the tax year basis using a long basis period combined with allowing all unused overlap relief achieve the best balance between simplicity and fairness? If not, is there a better option for transition?

There were 54 responses to this question.

The majority of respondents felt that the proposed transition method was the fairest and most simple way to move to a tax year basis. Some respondents expressed concerns over the potential cash flow impacts of having a longer basis period and the potential for increased tax liabilities, particularly for businesses that have low overlap profits to offset.

The most common suggestion to improve the transition was to delay its implementation for a year in order to allow time for accountants to prepare and for taxpayers to comprehend the changes. Some respondents also suggested that the transition could be made easier if HMRC were to provide or prepopulate each taxpayer’s available overlap relief.

The government appreciates the difficulties that could be faced by taxpayers when transitioning to new processes. The ‘next steps’ chapter of this document outlines how the government proposes to take the proposals forward.

Question 8b: Are there any other specific circumstances on transition to the tax year basis that would require additional rules?

There were 39 responses to this question.

The most commonly suggested circumstances that would require additional rules / consideration were the current anti-avoidance provisions and Companies Act requirements which prevent more than one change in accounting period within 5 years unless certain conditions are met, the effect that changing accounting date in the year of transition has on a business’s ability to take advantage of the spreading option, and the treatment of losses that arise in the year of transition.

Respondents also repeated concerns on the interaction between the proposals and pensions, farmers averaging / herd basis elections and DTR claims/foreign tax credits.

Question 9a: Would the proposals for spreading excess profit mitigate the impact of transition without affecting the simplification of moving to the tax year basis? If not, are there any other ways of mitigating the transition impact that you would suggest?

There were 55 responses to this question.

The consensus across respondents was that the proposals for spreading excess profits would largely mitigate the impacts of transition. The flexibility of an opt-in/opt-out basis was also appreciated. The majority of respondents also highlighted the perceived unfairness in the proposal if, as a result of spreading, businesses were to lose their personal allowances, enter a higher tax bracket or become liable to any additional amount of high-income child benefit charges, pensions annual allowance charges or similar.

A common viewpoint was that spreading would only fully mitigate the impact of the transition if tax rates remained consistent over the spreading years. It was suggested that this impact could be mitigated if the excess tax liability in the transition year could be spread, rather than a business’s excess profits.

Some respondents noted that individuals may struggle to understand the complexity of spreading and that it could cause an added burden on their time. Partnership respondents noted that keeping track of each of their partner’s choices in respect of whether or not to spread would be an additional administrative burden. They noted that the need to maintain records of the spreading adjustment would increase complexity and create additional workloads.

Question 9b: Would the proposal to spread excess transitional profits over 5 years be enough to resolve the cash flow impacts of the proposed reform? Are there any situations which would need additional rules or anti-avoidance provisions?

There were 53 responses to this question.

The majority of respondents reasoned that a 5-year spreading period was the best and most sensible option. Respondents also commented that the option to elect to spread excess profits over a shorter period of time was also welcome. Some called for a shorter period of spreading to be permitted. Other respondents expressed concerns over allowing any longer in terms of both administration and an unrepresented individual’s ability to support continuing liabilities.

Conversely, some respondents argued that a 10-year period would be fairer and more appropriate to mitigate the cash flow impacts of the proposal. Others suggested allowing a longer spreading period for those with higher transitional profits.

It was also noted that some businesses may automatically spread their excess profits over a longer period without properly understanding the implications this would have on later years. It was recommended that HMRC supply guidance and support to unrepresented taxpayers in this respect.

Question 10: Are there any other impacts, benefits, or costs in the core policy, transition, or mitigation proposals that we have not considered above?

There were 50 responses to this question.

Multiple respondents noted the close proximity of the proposals and requested they be deferred. Respondents also considered:

• the effect spreading may have on related non-tax issues such as mortgage and benefit applications
• the effect the proposals may have on the Salaried Member Rules
• the impact on pensions and annual allowances
• the costs relating to software system updates
• the operational challenges tax teams will face; in particular those representing large partnerships
• the costs associated with communicating the change to taxpayers
• the current review by the Office of Tax Simplification on whether to move the UK tax year
• a rise in businesses incorporating as a result of the changes
• the impact on enquiry time limits
• the interaction with Making Tax Digital (MTD)
• HMRC’s application of penalties and interest

Assessment of impacts

Question 11: Please tell us if you think there are any other specific impacts on other groups or businesses that we have not considered above.

There were 35 responses to this question.

The majority of responses to this question flagged impacts previously covered in this document but for completeness, the main recurring concerns included the impact of bunching of work for accountants and agents, HMRC’s capacity and the impacts on seasonal trades, farming, the medical profession as well as large, complex and international partnerships.

3. Next steps

Since the consultation closed on 31 August 2021, HMRC has been considering the evidence submitted in response to the consultation and exploring ideas to inform the further design of the policy.

The government has listened carefully to the views expressed in the consultation and on 23 September 2021 announced its intention to postpone by one year the reform of basis periods and the introduction of Making Tax Digital for Income Tax Self Assessment. This means the new basis period rules will apply from 2024 to 2025, with a transition year in 2023 to 2024. However, the detailed legislation for the rules will be introduced in Finance Bill 2021-22 in order to provide certainty of the changes well in advance of transition.

The government has also made some changes of detail to the proposed rules in response to the consultation.

First, the government has decided to treat any excess profits arising during the transition year as a one-off separate item of taxable income, rather than as part of a business’s normal trading income. This treatment will minimise the impacts on allowances and means-tested benefits that were raised during the consultation.

The government has also decided to extend the carry-back of loss relief arising due to excess overlap relief in the transition year from one to three years. This treatment will mirror the current rules for loss relief when a business ceases and provides the greater flexibility around use of excess overlap relief requested by some respondents during the consultation.

Finally, the government will explore carefully with stakeholders whether to introduce administrative or policy easements to minimise burdens caused by having to submit tax returns containing provisional figures, ahead of the transition year in 2023 to 2024. The options being considered are:

• allowing taxpayers to amend a provisional figure at the same time as they file their return for the following tax year
• allowing an extension of the filing deadline for some groups of taxpayers, such as more complex partnerships or seasonal trades
• allowing taxpayers to include in the next year’s tax return any differences between provisional and actual figures in the previous year
• leaving the current rules on provisional figures unchanged, whereby profits can be estimated in a return and amended as soon as final figures become available

Annex A: list of stakeholders consulted

AavRus & Co Ltd

Albert Goodman LLP

Allen Personal Tax Associates

Ashurst LLP

Association of Taxation Technicians (ATT)

Aviatrix Accountancy

Azets

Basically Bookkeeping Ltd

BDO LLP

Bishop Fleming LLP

British Medical Association (BMA)

British Private Equity & Venture Capital Association (BVCA)

Burgess Hodgson LLP

Cameron McKenna Nabarro Olswang LLP

Chartered Accountants Ireland

Chartered Institute of Taxation (CIOT)

Chavereys Ltd

Condie & Co Ltd

CR Jones & Co Ltd

Crowe UK LLP

D N Robinson Ltd

Deloitte LLP

DLA Piper UK LLP

Dowson Brothers LLP

Dudley Gore and Co

Elizabeth Whiteley Accountancy Ltd

Ella Bulloch Hats

Elman Wall Ltd

Eversheds Sutherland (International) LLP

Federation of Small Businesses

Freshfields Bruckhaus Deringer LLP

G Broadhead Ltd

Grace Gariff Associates

Harrison Riley Accountants Ltd

HCA Healthcare UK Ltd

Herbert Smith Freehills LLP

Hughes Accountancy

ICPA Ltd

Institute of Chartered Accountants in England and Wales (ICAEW)

Institute of Chartered Accountants of Scotland (ICAS)

Institute of Financial Accountants (IFA)

Irwin Mitchell LLP

Johnston Carmichael LLP

JVCA Ltd

Kennedys LLP

Kilbryde and Co

Kirkland & Ellis International LLP

KPMG LLP

London Society of Chartered Accountants’ Taxation Committee

Longhill Accounting Ltd

Low Incomes Tax Reform Group (LITRG)

Lymm Tax Services Ltd

Manchester Payroll Services Ltd

Mazars LLP

Menzies LLP

Mills & Reeve LLP

Moore East Midlands

National Farmers’ Union

Norman Elliott Chartered Accountants

Pett, Franklin & Co LLP

PwC LLP

Reddy Siddiqui LLP

Revenue Bar Association (RBA)

RH Accounting Ltd

Richard Place Dobson LLP

RSM UK Tax & Accounting Ltd

Saffery Champness LLP

SAGE (UK) Ltd

Sapphire Business Services (Banbury) Ltd

Simmons & Simmons LLP

TagMix Ltd

Tax Aid & Tax Help for Older People

TaxCalc Ltd

Taylor Wessing LLP

The Alternative Investment Management Association Ltd (AIMA)

The Association of Chartered Certified Accountants (ACCA)

The Association of Independent Specialist Medical Accountants (AISMA)

The Association of Partnership Practitioners (APP)

The Association of Practising Accountants (APA)

The Independent Tax & Forensic Services LLP

The Kubernesis Partnership LLP

The Law Society

Themis Advocates

Thompsons Solicitors LLP

Travers Smith Ltd

Trevor Ford & Co

Untied (UT Tax Ltd)

V J Patel & Co

Wolters Kluwer (UK) Ltd

Womble Bond Dickinson (UK) LLP

XERO (UK) Ltd

HMRC also received responses from 23 individuals. Some respondents chose to offer their views in confidence, so have not been included in the list above.