Tomorrow’s practice – the impact of basis period reform and MTD for income tax
Change is on the horizon for unincorporated businesses and their advisers. Basis period reform and Making Tax Digital for income tax (MTD ITSA) are the biggest changes to income tax administration since the roll out of self assessment in 1996. What is the impact and how can firms prepare?
Basis period reform for trading income for unincorporated business is an opportunity for firms to engage with their small business clients. It undoubtedly will result in some additional advisory and tax planning opportunities. It will be important for practices to explain the value of the additional work and look beyond necessary compliance service.
What is the impact?
Basis period reform impacts all unincorporated business which don’t have a 31 March/5 April accounting year end. The impact will be particularly significant for businesses with a year end early in the tax year.
The impact is both administrative, affecting timescale for preparation of accounts and submission of return, and financial, as tax will be payable nearer to real-time. There will also be a ‘catch-up’ tax bill on additional profits for many in the move to tax year basis of assessment.
When taken alongside Making Tax Digital for income tax (MTD ITSA) quarterly reporting it is likely to result in increased concentration of workloads within firms. This will increase resourcing demands and may also result in increased costs for clients.
Pressure on resources
What does this look like on practice? A key impact is that accounts will be needed sooner as submission date for tax returns moves closer to real time. MTD ITSA quarterly reporting also means providing a date to HMRC earlier.
Consider a business with a 30 June accounting date. Basis period reform and MTD ITSA will mean that the following accounts will be needed:
- 30 June 2022 accounts: needed for filing ITSA return for 2022-23 by 31 January 2024
- 30 June 2023 and 30 June 2024 accounts, needed to finalise taxable profit for the transition year of 2023-24, by 31 January 2025
- Quarter to 30 June 2024: under MTD quarterly reporting, needs to be submitted by 5 August 2024
In the period January 2024 to January 2025 this means that potentially three years accounts need to be finalised.
In addition to the workload, there are decisions and choices. Should businesses change their accounting year end to 31 March to avoid the need to apportion profits to match the tax year? And if so, when should the change be made?
There is also the impact on tax bills to consider. What will the impact be on tax bills for 2023-24 onwards and how can this be mitigated?
Spreading relief and overlap relief may help reduce the impact of higher transition year profits, but their availability depends on timing, business history and an individual’s specific circumstances.
ICAS practice briefing
ICAS has prepared a briefing to help inform decisions: Tomorrow’s practice - the impact of basis period reform and MTD for income tax. The briefing provides worked examples and reviews the options available to businesses and firms.