Basis period reform – Budget update

Alongside the Finance (No.2) Bill 2021-22 published on 4 November 2021, which includes legislation to amend Part 2 of the Income Tax (Trading and Other Income) Act 2005, HMRC also published the outcome of the consultation for the basis period reform. The consultation was seeking views on how best to implement the proposals to simplify the basis period rules for self-employment income.

These reforms will amend the basis period for all self-employed business owners to the end of the tax year, meaning that a self-employed business’ taxable profits or allowable losses would arise in the tax year itself, regardless of its accounting end date.

Considering views expressed in the consultation, the government recently announced that the intended changes to the basis period rules were to be postponed for one year, coinciding with the delay in the introduction of Making Tax Digital for Income Tax.

The basis period reform will now take effect from 6 April 2024 with a transition year in the 2023-24 tax year.

In addition to the delay in the implementation of the reforms, the government has also made changes to the proposed rules. Firstly, it has been decided to treat any excess profits arising during the transition year as a one-off separate item of taxable income, rather than this being part of the normal trading income.

Secondly, the carry-back of loss relief arising due to excess overlap relief in the transition year will be extended from one to three years. Finally, the government will consider whether to introduce policy or administrative easements to lessen burdens produced by having to submit tax returns that contain provisional figures, ahead of the 2023-24 transition year. 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; and
• 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.

Whilst the implementation of these new rules has been postponed for one year, businesses and individuals that will be affected by these changes should nevertheless consider starting to prepare for the implementation sooner rather than later with a view to reducing any additional burden imposed by the introduction of these new rules.