Key measures delayed
Earlier this year, the government announced that the basis period system would be reformed so that all unincorporated businesses would be required to adopt a tax year basis period, irrespective of their accounting period. One of the cited reasons is to bring the payment date for income tax closer to the date the underlying profits are earned. On the current year basis (and assuming the opening years rules don't apply), a sole trader with an accounting period ending on 30 April won't need to account for tax on their profits for 21 months (excluding payments on account) following the end of their accounting year. A tax year basis would cut this to nine months. When first announced, it was intended that 2022/23 would be a transition year whereby all affected businesses' basis period for the year would be extended to 5 April 2023, with any overlap relief deducted. The first year of the new tax year basis would then be 2023/24 accordingly.
On 23 September, a ministerial statement confirmed that the implementation would be delayed by at least one year, and the transition year will now be 2023/24 at the earliest. This followed the launch of a Finance Bill sub-committee inquiry into the proposals in the previous week. It is expected that a further announcement will be forthcoming at the Autumn Budget on 27 October.
The Income Tax (Digital Requirements) Regulations 2021 were also published on 23 September, and confirmed that Making Tax Digital for Income Tax (MTD ITSA) will be implemented from April 2024, one year later than initially announced. The reason for this latest postponement is to give people enough time to prepare for the changes in the wake of the COVID-19 pandemic.
Subject to any further delays, sole traders (regardless of their accounting date) and landlords with annual turnover exceeding £10,000 will now be mandated into MTD ITSA from 6 April 2024. General partnerships will follow in 2025, with other types of partnerships (e.g. mixed partnerships, LLPs etc.) to be allocated start dates later on.
Once mandated, the business will be required to keep digital records and send quarterly summaries of income and expenses to HMRC using compatible software. There will be no change to the current system of payments (at least initially), i.e. the tax will be due on 31 January following the end of the relevant tax year, with two balancing payments due where the circumstances warrant them.
The entry threshold of £10,000 will now be measured against the profits for 2022/23. It is hoped that this will remove any temporary effect of the pandemic on the benchmark results.
There is a useful HMRC webinar on MTD ITSA available by signing up here.
Additionally, the new penalty system that was scheduled to be introduced alongside MTD ITSA has also been postponed until 2024/25.