FB: Update on income tax basis period reform and earlier payment of tax

The reform, which affects individuals, trusts, partnerships and others subject to Income Tax on trading income, will take effect from the 2024/25 tax year, with 2023/24 being the transitional period. The overall impact will be to change the underlying profits or losses subject to tax and bring forward the time at which tax on such profits is due for payment. HMRC are bringing in this reform to remove the complex rules relating to basis periods and overlap profit and to tax traders closer to the point at which their profits are generated. Finance Bill 2022 sets out how the profit or loss for the transitional period should be calculated and provides further welcome detail on loss relief and the protection of allowances and benefits.

The proposed income tax basis period reform was originally outlined in our previous Tax Matters Digest article published in August 2021 – see Income tax basis period reform and earlier payment of tax.

Following the consultation period, the Government announced in September 2021 that it would postpone the reform by one year to the 2024/25 tax year. This was to give affected parties more time to plan for the changes.

Subsequently in the Budget on 27 October 2021, the Government announced that where businesses had higher profits in the 2023/24 tax year as a result of the change in basis, legislation would be enacted to automatically spread the transitional period profits over a five-year period, with the ability to elect out of spreading and accelerate the tax due on transitional profits should the business wish to do so. This treatment is confirmed in Finance Bill 2022.

A further full response to the consultation was published on 4 November 2021 and confirmed that the following desired changes had been made in response to concerns raised during the consultation period:

• Any excess profits arising during the transition year will be treated as a one-off separate item of taxable income, thereby minimising the impacts on allowances and means-tested benefits; and
• Any losses created by the deduction of overlap profits in the transition year can be carried back for up to three years.

The legislation relating to these changes is included in Finance Bill 2022.

The response also stated that the Government  will explore carefully with stakeholders whether administrative or policy easements should be introduced to help minimise burdens caused by having to submit returns containing provisional figures.

The legislation contained in Finance Bill 2022 clearly sets out how profits and losses should be calculated in the transition period and, with the revised treatment of losses referred to above, should ensure a fair outcome is achieved.

Now it is clear this reform will go ahead; we recommend taxpayers seek expert advice in order to fully understand the impact these changes will have on their business and determine what actions to take to manage the impact on cash flow.

For further information please contact:

• Jane Crotty
• Simon Johnson