Chartered Institute of Taxation: Ease pressure on businesses by delaying digital tax reform, says CIOT

The Chartered Institute of Taxation (CIOT) is urging the Government to delay a change to how sole traders and partnerships calculate their taxable profits each year – and is also calling for a delay to the controversial Making Tax Digital for Income Tax Self-Assessment proposals. The CIOT believes both proposals will put major pressure on businesses and advisers already reeling from the impact of the COVID-19 pandemic.

The reform of the basis period rules is due to start taking effect from April 2022. The CIOT is concerned at how little time affected businesses, and those who advise them, have to prepare for the new regime, and, for some, budget for paying tax earlier than they might otherwise have paid it.

In a submission to a government consultation,1 the CIOT recognised the clear link between the change to the basis period rules with HMRC’s Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) project, which will see unincorporated businesses having to keep digital records and report their income to HMRC every quarter from April 2023.2

Richard Wild, Head of Tax Technical at CIOT, said:

“We strongly recommend that any changes to the basis period rules are deferred by at least a year to allow for more thorough consultation, greater understanding of the wider impacts of the change, such as the interaction with MTD for ITSA, and a longer lead in time to allow businesses, agents and HMRC a chance to prepare.”

The CIOT said such preparation is not solely related to the tax position, but – for those businesses that wish to move their year end to 31 March or 5 April – to deal with the significant practical issues which will arise.

The CIOT has told the Government that many businesses which have survived the pandemic are looking for a period of stability and rebuilding. Adding financial and administrative burdens on already overworked business owners and their agents at this time could prove counter-productive. The CIOT believes the extremely short timescales for consultation and implementation are likely to result in mistakes and unforeseen outcomes.

The Institute is also pressing for a delay because the wider tax administration environment is already bringing, or proposing, significant further changes: MTD is being further extended in April 2022 to voluntarily VAT-registered businesses and in April 2023 to ITSA, bringing with it an entirely new penalty regime, and the Office of Tax Simplification (OTS) is currently undertaking a review of the UK’s tax year end date.

On MTD, Richard Wild said:

“We recommend that mandation of MTD for ITSA, which is currently due to start in April 2023, is also deferred to allow the basis period rules to ‘bed in’, provide adequate time for software development and testing, and again ensure businesses, agents and HMRC are prepared.”

While potentially achieving the simplification HMRC desire in relation to MTD reporting, the basis periods proposals bring with them several downsides, warns the CIOT. Changing the tax return deadline of 31 January might be necessary as a result.

Richard Wild said:

“We are concerned about the likely bunching of work for businesses, agents and HMRC, as even more businesses will adopt a tax year (or equivalent) accounting period end, and MTD for ITSA quarterly reports will have to be made based on calendar quarters.

“To ease the pressure, the Government should consider extending the deadline for submitting the MTD for ITSA quarterly reports from one month to two months after the end of the relevant quarter. The Government should also consider a later Self-Assessment filing deadline – such as 31 March rather than 31 January. This will not only help spread the workload, but will in part address the need for estimates in – and amendments to – returns, something which is a worrying consequence of the basis period reforms.

“There are many issues related to changing the basis period which, while affecting a modest number of taxpayers, when taken together show that a significant amount of work is needed to inform taxpayers of these changes, prepare for them, and deal with the consequences.

“The Government is keen to build trust in the tax system, but rushing in changes to its fundamental building blocks, in order to make possible the introduction of a policy which remains controversial, will not help that aim.”