Further to the our previous article on basis period reform, HMRC has now put out a Technical Paper with some considerations on how to deal with Provisional Figures. The Technical Paper is being used as a foundation for a series of discussions with stakeholder groups. The discussions will run until 27 May 2022.
This is a critical discussion as some self-employed individuals will find that the move to a tax year basis of reporting their profits will mean that, every year, they are being asked to report profit figures before all relevant accounting periods have concluded and/or financial statements have been prepared.
Example:
A business that prepares accounts to 28 February each year will find themselves in the following position, unless they choose to change their accounting year end.
2022/23 – The taxable profits from the year to 28 February 2023 are used as the basis of assessment for the tax year.
2023/24 – The taxable profits from the year to 28 February 2024 plus 36/365ths (1 month) of the taxable profits from the year to 28 February 2025 will be used as the basis of assessment for this tax year of transition in the reform. Adjustments will be made for overlap profits held and there may be a spreading of ‘excess profits’ as set out in the earlier article.
Note – the 2023/24 declarations of taxable profits must be made by 31 January 2025. The taxable profits from the year to 28 February 2025 will not be known by then!
2024/25 – The tax year basis of assessment will require 329/365th (11 months) of the taxable profits from the year to 28 February 2025 and 36/365ths (1 month) of the taxable profits from the year to 28 February 2026.
Note – the 2024/25 declarations of taxable profits must be made by 31 January 2026. The taxable profits from the year to 28 February 2026 will not be known by then!
And so on. The same issue will, save for changes discussed in the Technical Paper, arise in every future tax year.
There are wide ranging opinions on the possible client year-ends that could be affected by this issue. Even where the accounting date falls before 31 January, time needs to be factored in to produce financial statements and construct the tax adjusted profits.
Current rules – provisional figures
Businesses that do not have all of the information that they need to finalise their tax return by the deadline are required to submit a return including provisional figures. Businesses should provide a provisional ‘best estimate’ of the figure needed in their return when filing, and then update the provisional figure through an amendment as soon as possible when the actual figures are available.
It can be seen that affected business owners will always be required to make two submissions to finalise their tax position for each tax year. This substantially increases the administrative burden associated with the self-assessment process.
Any additional tax must be paid within 30 days of the amendment.
New Technical Paper
HMRC’s latest document sets out 4 possible courses of action:
Allow taxpayers to amend a provisional figure at the same time as they file their return for the following tax year.
Allow an extension of the 31 January filing deadline for some groups of taxpayers, such as more complex partnerships or seasonal trades.
Allow an extension of the 31 January filing deadline for some groups of taxpayers, such as more complex partnerships or seasonal trades.
Leave the current rules on provisional figures unchanged.
Some other (less likely) suggestions are also made:
Allow a limited ‘Corporation Tax-Style Filing’ whereby filing dates are based on accounting dates.
As an alternative to Option 3, adopt a ‘Safe Harbour’ approach that could allow adjustments in the following year, or not require adjustments at all, where the difference between the actual and estimated amount is within some threshold, such as 5% of profits.
The Technical Paper also puts forward an exploration of specific easements for partnerships. The government is open to thoughts and suggestions on how to reduce admin burdens on complex partnerships. For example, for some large partnerships with tens or hundreds of partners, amending each partner’s return to correct a central partnership-level provisional figure scales up the admin burden of provisional figures significantly. The government is interested in stakeholder views on how to reduce this burden for large partnerships, such as by allowing partnership-level reporting and amendments or automatically feeding through these amendments to partner returns.
This whole topic is something we are watching closely at 2020 Innovation and we’ll keep you updated via our MTD Hub pages and our Monthly Tax Updates.
Our Technical Director, Sharon Cooke, sits on the London Society of Chartered Accountants Tax Committee and if you have any specific responses to the above that you’d like her to feedback to HMRC, you can email her at Sharon.cooke@the2020group.com
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