Making Tax Digital And The ‘Tax Year Basis’
Update: The move to a ‘tax year basis’ of assessment has been delayed until 6 April 2024, with the transition year being 2023/24.
For many years both tax payers and tax professionals have called for the simplification of the tax system. The introduction of the Office of Tax Simplification (OTS) in 1996 was welcome and gave hope to those many. A recent review of the work carried out by the OTS highlights many successes but it has also been swimming against a torrent of new and increasingly complex legislation.
One simplification that was made in 1996/97 was the change from the ‘preceding year basis’ of taxation to the ‘current year basis’. Sole trades and partnerships are now taxed on the profits arising in the accounting period which ends in the tax year, but they can still choose an appropriate accounting year end. However, other income such as investment income or property income is taxed on the amount arising in the tax year.
A new consultation has emerged proposing a further change from 2023/24, meaning all sole trades and partners will be taxed on a ‘tax year basis’. The timing is to coincide with the introduction of Making Tax Digital for income tax (MTD4IT) and may force all businesses to have a 5 April (or 31 March) year end. It will facilitate the quarterly reporting of income to HMRC and the early payment of tax.
Making Tax Digital for VAT is now in place and working relatively smoothly for most businesses, but VAT was always a quarterly submission and therefore the change was not a dramatic one. The main challenge will face those businesses not currently registered for VAT. Businesses pay VAT quarterly (or monthly) and individuals pay income tax on pensions and employment earnings monthly (or weekly), so why not income tax on business profits?
There is merit in these proposals provided the Government and HMRC can prioritise the provision of the world class digital platform that they have promised and accommodate tax agents and the digitally excluded along the way. Perhaps simplification is on the way!