Professional bodies in the UK have criticised the speed of proposed reforms to the tax system and have written to the government advising a slower timetable for the next phase of tax administration changes known as Making Tax Digital, and for the amendments to basis periods for tax purposes. In the opinion of the professional bodies the current timetable for reform would put too much pressure on businesses in addition to the problems arising from the pandemic.

Making Tax Digital

Under the next stage of the UK government’s changes to tax assessment and collection known as Making Tax Digital, more than four million small businesses and self-employed people will be required to maintain digital records and report their results to HMRC on a quarterly basis. The changes are scheduled to commence from April 2023.

Basis Periods

HMRC has issued a consultation document setting out a proposed simplification of the income tax system in relation to basis periods for computing income tax. This aims to simplify compliance procedures for small unincorporated businesses and allow them to transition more smoothly to the rules under Making Tax Digital. Currently under the income tax rules for unincorporated businesses and the self-employed the profits shown by accounts drawn up for a period ending within a tax year are taken as the basis for the tax charge for that tax year. Under the proposed changes, these taxpayers would be taxed on their business profits actually arising in a tax year, in line with the taxation of other types of income.

This change would eliminate the complex rules that apply to the years of commencement and termination of an unincorporated business, under which new businesses are often taxed on the same profits twice in their opening years of trading. The proposed change, which is due to commence from 2022, would affect around 250,000 partners in businesses and 280,000 sole traders.

The letter from the professional bodies pointed out that businesses and self-employed taxpayers would need time to budget for tax payments that would be made earlier as a result of the proposed changes. This would put pressure on the businesses and on their professional advisers at a time when the combined problems of Brexit and the pandemic have already posed challenges for business.

Pressure on HMRC

The changes would also put pressure on HMRC which has had to focus on delivering support measures in the pandemic and has fewer resources to devote to routine matters such as answering telephone calls. The proposed changes would increase the number of calls as businesses and self-employed people would want clarification on details of the changes. Further taxpayer information and education would be required to reduce delays and mistakes in implementing the changes.

The letter from the professional bodies notes that a proposed new penalty system that would apply to certain taxpayers from April 2022 would add to the pressure on taxpayers.