Basis period reform – HMRC’s proposal to address the challenges

Alex Conway, Director, Professional Practices

In Autumn 2021 the government announced the reform of basis periods – a change in the rules governing the taxation of partners in firms (and sole traders) which do not have a 31 March or 5 April year end.

Our previous articles Basis period reform: reminder and minor alteration in proposal and Final details of the basis period reform announced provide helpful reminders of the changes and their potential impact.  

Consequences of the reform

Where a firm does not have a 31 March year end it will need to apportion its profits to be in line with the tax year (31 March is deemed to be co-terminus with the 5 April).

A number of partnerships and sole traders with non-31 March year ends will be unable to produce final taxable profit figures by the required filing deadline of 31 January following the tax year end. As a result, we expect there to be an increase in the number of estimated tax returns.

HMRC recently issued a technical consultation regarding options to address some of the challenges and concerns to help alleviate the burden associated with the filing of provisional tax returns and figures.

Our discussions with HMRC

As part of our response to the consultation, we engaged with HMRC in a round table discussion to talk through the options they have proposed:

  1. Amend the provisional figures and return at the same time as the following year tax return, preventing out-of-cycle filings.
  2. Allow an extension to the normal filing deadline for taxpayers that fit specific criteria.
  3. Allow an adjustment in the following year’s tax return, as a result of any difference between provisional and final figures, which will affect the tax year the return is being filed for.
  4. A ‘safe harbour’ approach, where adjustments are not required if the difference is within a certain range.

From our discussion it was apparent that HMRC are keen to hear all merits and potential issues with the proposed options outlined, but also acknowledged that no option will satisfy all taxpayers.

It was also noted that the reform is not looking to alter other areas of the tax legislation outside of basis period reform, such as the current tax payment and interest system. Therefore, if a firm is having to file an estimated tax return, it will be vital that they produce accurate estimates to avoid partners suffering interest charges on underestimated tax liabilities once the returns have been finalised.

In our view, the aim of the consultation should be to produce an option that is simple to understand, removes administration pressures on firms and does not create additional taxes/payments. Taking this into consideration, we suggest an adjustment to option 1 – Crowe’s option 1A - where the prior year’s figures can be amended by recording the adjustment on the following year’s tax return.

 Have your say

We are formally responding on the consultation at the end of this week. As part of our response, we would like to hear your views. Take part in our short survey to let us know what you think. The survey should take no longer than two minutes to complete.

Take part in our survey

If you have any queries on the HMRC’s consultation on basis period reform provisional figures or basis period reform in general please contact us.

Contact us

Nicky Owen
Nicky Owen
Partner, Professional Practices