Basis periods: Government commits to explore further easements

The announcement came in the Government’s response (published 2 February) to the House of Lords Finance Bill Sub-Committee’s December report on basis period reform and uncertain tax treatment. In addition to accepting two of the sub-committee’s recommendations the Government have partly accepted a further six, including promising to inform businesses of overlap figures HMRC hold where they have them, and looking into the feasibility of reconstructing overlap figures where records are not held.

However the Government has rejected recommendations from the sub-committee that Making Tax Digital for Income Tax should be further deferred for some taxpayers, that all consultations involving a significant reform of the tax system should begin at Stage 1, and that the Government should commission an independent report on HMRC customer service levels and capacity.

The Lords report had cited CIOT, ATT and LITRG evidence extensively (in 42 places in total, excluding footnotes), including on a number of the areas where the Government has given a positive response to the recommendations.

Government responses to the sub-committee’s recommendations

Basis period reform

Recommendation 1: Estimation and apportionment (ACCEPTED)

The sub-committee said: “When this work [on apportionment and estimation] is completed, but before final decisions are reached about the way forward, we recommend a reassessment of the additional compliance costs which businesses in this position will bear as a result of the reform.” (paragraph 34)

The Government says: “The Government accepts this recommendation… [T]he Government is planning to explore the issue of provisional figures with stakeholders and will consider whether and how to introduce further easements. This engagement is planned to start in late February 2022, with a decision on whether and how to introduce an easement following by autumn 2022. Further insight into the costs to businesses of provisional figures and the administrative savings of potential easements will be gained through planned engagement with businesses and stakeholders over the coming months. After this engagement, the Government will reassess the administrative costs and savings to businesses of basis period reform under the options being considered.”

Commentary: The sub-committee drew heavily on evidence from CIOT, LITRG and ATT in concluding that the Government had failed to adequately think through the difficulties that estimation and apportionment of profits pose for businesses unable to align their accounting periods with the tax year. It is very welcome that the Government will be engaging with ourselves and other stakeholders on these issues over the course of this year, and that it will in due course reassess the costs and savings of this reform.

Recommendation 2: Overlap relief (PARTLY ACCEPTED)

The sub-committee said: “We recommend that by 5 April 2022 HMRC should commit publicly to providing details of overlap relief from their records for those businesses that need it and, where a specific record is not available, reconstruct the amount available from the information HMRC has.” (Paragraph 40)

The Government says: “The Government accepts this recommendation in part… The Government would like to inform businesses, if possible, of the figures that HMRC holds on overlap relief in advance of the basis period reform transition year of 2023-24. Where HMRC does not currently hold a specific record on the amount of overlap relief carried forward, it may be possible to identify overlap periods in past years’ tax returns and reconstruct a figure for overlap relief. HMRC is exploring the feasibility and resources required to provide reconstructed overlap relief figures before committing to provide these figures… The Government cannot commit to providing details of overlap relief and reconstructing amounts where a specific record is not available by 5 April 2022.”

Commentary: This is a positive move, largely in response to evidence provided to the committee by LITRG and CIOT. CIOT specifically said that a business or its agent should be able to obtain or check overlap figures with HMRC. LITRG emphasised the importance of this being done proactively. We hope that this will prove feasible.

Recommendation 3: Impact on tax liabilities (ACCEPTED)

The sub-committee said: “Our witnesses voiced a number of valid concerns about the additional tax liabilities some businesses could face on the transition to the new basis period rules, and made some suggestions about how these might be mitigated, which the Government should consider.” (Paragraph 45)

The Government says: “The Government accepts this recommendation… [It] has responded to feedback from stakeholders in formulating the transition rules that have now been included in the legislation in the Finance Bill. These updated rules ensure that the tax impact of the transition to the tax year basis is not felt in a single year; they minimise the effects of the transition on allowances and benefits while ensuring that profit is taxed appropriately; and they also ensure that businesses are able to access as much relief as possible on transition… The Government will continue to consider feedback on the transition arrangements for basis period reform in advance of the transition to the new tax year basis.”

Commentary: While the acceptance of this recommendation is welcome, all it is saying is that the Government continues to have an open mind on further mitigations. There is, for example, no direct response to the CIOT’s proposal (included in the sub-committee’s report) that “Consideration should be given to ring-fencing the excess profit and treating it as a one-off receipt (including when the profit is spread) and taxing it at the individual’s marginal tax rate ignoring that excess profit, rather than treating it as additional income.”

Recommendation 4: Resources (PARTLY ACCEPTED)

The sub-committee said: “While noting the resources that HMRC has assigned to the implementation of this policy, we recommend that the Government and HMRC review the resources required for basis period reform and Making Tax Digital for income tax, in order to maximise the chances of a smooth implementation. In particular, we recommend specific resources should be allocated to retrieving and providing information about overlap relief to relevant businesses. (Paragraph 53)

The Government say: “The Government accepts this recommendation in part… HMRC is keeping the implementation costs for basis period reform under review and will continue to review the estimated cost as the reform progresses… The Government has also considered the resources required to successfully implement the next phases of MTD… the TIIN for MTD on 23 September 2021 [shows] an estimated cost to HMRC for the next phases of MTD expansion at £362m. The Government cannot yet accept the recommendation to allocate specific resources to retrieving and providing information about overlap relief, as it is still exploring the suggestions that have been made by stakeholders on supporting businesses and agents with overlap relief”.

Commentary: The points made here by CIOT/ATT and other professional bodies were largely about the level of strain the reforms will place on all involved, and warning of the likelihood of HMRC’s wider service levels falling. It is reasonable that, with HMRC still exploring what to do in relation to providing information on overlap relief, they cannot say what resources they will allocate to this, but perhaps they might have gone further in indicating that additional resources will be provided for this purpose if that is necessary?

Recommendation 5: Preparation for change: raising awareness (PARTLY ACCEPTED)

The sub-committee said: “We recommend that HMRC contacts directly all taxpayers with accounting periods which are not aligned with the tax year to alert them to the change and its implications for them and to inform them of what support is available.” (Paragraph 55)

The Government say: “The Government accepts this recommendation in part. The Government recognises the importance of communication with taxpayers who are affected by basis period reform and with tax agents… A number of stakeholders have offered to help HMRC in getting the communications right, particularly for unrepresented taxpayers. The Government is currently considering the most appropriate communications methods and approaches for basis period reform, and is discussing these with external stakeholders”.

Commentary: LITRG had suggested HMRC should ““proactively identify and contact unincorporated businesses with accounting period ends other than 31 March or 5 April to encourage them to consider the impact of basis period change as soon as possible”. This is another response that says, essentially, ‘we are thinking about it and talking to stakeholders’. We will have to wait and see what results.

Recommendation 6: Preparation for change: raising awareness (PARTLY ACCEPTED)

The sub-committee said: “HMRC should issue comprehensive guidance about basis period reform by 5 April 2022, including details of how unrepresented taxpayers can obtain support, and make a helpline number available.” (Paragraph 56)

The Government say: “The Government accepts this recommendation in part. The Government will be able to offer comprehensive tax guidance, including examples, covering basis period reform immediately after the Finance Bill receives Royal Assent which could come before or after 5 April 2022… The Government is considering how best to support unrepresented taxpayers through basis period reform… A general taxpayer helpline number is available to support represented and unrepresented taxpayers through basis period reform. The extra resource needed to deal with additional queries to this general helpline has already been taken into account in HMRC’s delivery cost estimates for basis period reform.”

Commentary: This recommendation was largely a response to points in CIOT/LITRG evidence. With Finance Bill Royal Assent likely to come in the last few days of February or the first week of March it is likely the Government will be able to meet it in full (subject to whether the promised ‘comprehensive’ guidance actually is genuinely comprehensive). This is another area where the Government are still considering the way forward.

Recommendation 7: Conclusions (REJECTED)

The sub-committee said: “We therefore recommend that, for those businesses which do not have a 31 March–5 April year end, Making Tax Digital should be deferred until at least 2025–26. This is also the earliest date at which partnerships—which are disproportionately represented in this group of businesses—are due to be brought into MTD. For the largest partnerships which are particularly adversely affected by basis period reform, no date for the implementation of MTD has yet been set.” (Paragraph 66)

The Government say: “The Government does not accept this recommendation… [The] later MTD start date for partnerships already gives these complex businesses additional time to adapt to the new tax year basis after transition, and so they already benefit from the recommended deferral. Looking at the remaining group of affected sole traders, not all of which will be mandated to join MTD… [d]ifferentiating would mean that otherwise identical businesses would see different MTD start dates solely due to their different periods of account… [A] business’s choice of when to draw up accounts is not a strong enough concept to justify differential treatment. The recommended approach would also introduce the risk of businesses specifically changing their accounting date away from a simple tax year accounting date in order to delay the point at which they join MTD…”

Commentary: The sub-committee cited concerns from LITRG and ATT in particular in relation to the amount of change happening in a short space of time, and the pressure this will put on businesses and their advisers. However none of ATT, CIOT or LITRG argued for MTD for ITSA to be delayed just for those without a 31 March – 5 April year end – indeed it is not clear whether any of the witnesses to the inquiry suggested this.

Uncertain tax treatment

Recommendation 8: The test of uncertainty (third trigger) (PARTLY ACCEPTED)

The sub-committee said: “We recommend that, before legislating for this third trigger, an evidence-based evaluation of the measure in its current form be carried out to identify whether it does indeed deliver the benefits that HMRC tells us it is expecting. We also recommend that, if such an evaluation shows that the requirement is not delivering the benefits that HMRC expects, then the notification requirement in its entirety should be repealed.” (Paragraph 119)

The Government say: “The Government accepts this recommendation in part. The Government agrees that new policy measures should be monitored to ensure they are proportionate and achieve the policy objectives and expected benefits. The Government is committed to doing this for the uncertain tax treatment regime… While the Government agrees that monitoring is essential, it will not give a complete answer to the need for a third trigger, because the additional trigger would necessarily target uncertainties otherwise untouched by the current regime. The Government therefore intend to monitor the current regime in parallel with continuing discussions on the third trigger.”

Commentary: It is welcome that the Government have put on the record that they believe new policy measures should be monitored to ensure they are delivering as intended. However there is no indication they will be subjecting UTT to any greater scrutiny than the typical new measure. Despite widespread opposition among professional bodies to the ‘third trigger’ the Government still appear keen to pursue this.

Recommendation 11: HMRC compliance burden and support for businesses (PARTLY ACCEPTED)

The sub-committee said: “All businesses affected by this measure must be supported appropriately by HMRC. We have concluded previously that, should this proposal go ahead, the Government should commit to ensuring that every business affected had a customer compliance manager.” (Paragraph 137)

The Government say: “The Government accepts this recommendation in part. The Government has asked HMRC to ensure appropriate support is provided for all businesses affected by this measure, including webinars and guidance on how HMRC proposes to interpret and apply the legislation. The Government believes that businesses that do not have a customer compliance manager (CCM) should have an equivalent level of service and support as those that do, through the Mid-sized Business Customer Support Team… HMRC has also established a working group, involving external stakeholders, to identify and prioritise issues across tax technical guidance that require updating…”

Commentary: HMRC believe equivalent support to CCMs can be provided through the Mid-sized Business Customer Support Team. That remains to be seen. It is interesting that while this was not marked out as a recommendation (as opposed to a conclusion) of the sub-committee’s report the Government have nonetheless chosen to reply to it.

Common themes

Recommendation 9: Failure to follow the Tax Policy Framework (REJECTED)

The sub-committee said: “We recommend that in future all consultations involving a significant reform of the tax system should begin at Stage 1 and invite the Government to make a renewed commitment to that effect.” (Paragraph 150)

The Government say: “The Government does not accept this recommendation… [T]he Government needs to take a proportionate approach to consultation on tax policies in development taking into account a range of factors depending on what is driving the need for a policy response… [W]hilst the public stages of tax consultation sometimes begin at stage 1 (call for evidence), it is common and appropriate for many consultations to begin at stage 2 (policy consultation), and this will continue to be the case.”

Commentary: This recommendation was largely a response to CIOT evidence and it is disappointing that the Government has rejected it.

Recommendation 10: Resourcing for implementation (REJECTED)

The sub-committee said: “We recommend that the Government commission an independent report on HMRC customer service levels and capacity. The report should separately consider HMRC’s performance in terms of its existing commitments and responsibilities to taxpayers and what will be needed in terms of additional resourcing for it to be able to deliver basis period reform and MTD for income tax without any adverse effect on overall service levels. (Paragraph 155)

The Government say: “The Government does not accept this recommendation. The Government does not believe that an independent report on HMRC customer service levels and capacity is required. The Government is already transparent in relation to service levels and the steps taken to improve them… The Spending Review process… considers the demands on the Department, including on both customer service and policy development, in order to arrive at an agreed spending settlement that will ensure HMRC has sufficient resources…”

Commentary: This recommendation largely flowed from CIOT and ATT evidence, though we had not specifically called for it. We highlighted the pressure likely to be placed on businesses and their advisers if basis period reform and MTD for income tax were to be implemented in consecutive years

By George Crozier, CIOT External Relations Manager