The Institute of Chartered Accountants in England and Wales (ICAEW) has urged the Government to “drop” the proposed basis period reforms.
The regulator said the changes will “cause as many problems as they solve” and would be a “backwards step” for affected business owners.
What are the changes?
Announced earlier this year, HM Revenue & Customs (HMRC) said changes to the basis period rules would simplify accounting for small traders and the self-employed by removing “complex rules” arising when accounts and profits overlap tax years.
Under the existing regime, tax returns are based on a business’s set of accounts ending on 05 April, known as the end of the tax year.
But when accounts are drawn up to a date different to the end of the tax year, taxpayers pay tax for their first tax year on the period to the end of the tax year, and then in subsequent years based on their full accounting year – meaning profits are “taxed twice”.
The reforms mean businesses will only be taxed on profits arising in a tax year – rather than profits of accounts ending in the tax year – aligning the way self-employed profits are taxed with other forms of income, such as property and investment income.
“Backwards step for affected businesses”
In its response to HMRC’s consultation, the ICAEW said “implementing such changes ahead of the introduction of Making Tax Digital for income tax self assessment (MTD ITSA) would not provide any genuine simplification to the UK’s tax system”.
Instead, the reforms would only “increase costs, complexity and uncertainty for those businesses affected” and “could damage the UK’s attractiveness as a place for the location of international service firms”.
The ICAEW also argues that:
- The reforms would impact international firms who purposely choose to align their accounting period with 31 December – the “international standard” for tax year end.
- The proposed changes would impact seasonal businesses, such as those affected by the timing of Easter and harvest, as well as GP practices.
The full response can be found here.
Get advice today
The latest statistics suggest around seven per cent of sole traders and 33 per cent of trading partnerships are likely to be affected by the reforms. For help and advice with related matters, please get in touch with our small business and self-employed accounting team today.