Peers hear business concerns over basis period reform

Peers on the Finance Bill Sub-Committee heard from tax experts and business representatives in two sessions on Thursday 21 October. In the first Malcolm Gammie QC, Chairman of the IFS Tax Law Review Committee (TLRC), and Bill Dodwell, Tax Director of the Office of Tax Simplification (OTS), gave evidence. In the second Rebecca Benneyworth, Member of the Administrative Burdens Advisory Board (ABAB), Andrew Chamberlain, Director of Policy at the Association of Independent Professionals and the Self-Employed (IPSE), and Mike Cherry OBE, National Chair of the Federation of Small Businesses (FSB).

The questioning covered notification of uncertain tax treatment by large business as well as MTD and the basis period. The sessions took place before this week’s Budget and the announcement that basis period reform will go ahead. We have merged the comments in the two sessions into this single report.

Making Tax Digital

Responding to Committee Chair Lord Bridges of Headley (Conservative), OTS’ Bill Dodwell said that MTD did not require much of taxpayers, other than keeping digital records that were uploaded quarterly, and was designed to reduce the ‘tax gap’. Keeping tax records to the month end rather than 5 April is easier to calculate on basic tax software, he added.

Crossbench peer Lord Butler of Brockwell asked about the potential of introducing MTD without basis period reform. In answer, Dodwell acknowledged that this would be simpler to implement. Gammie agreed, noting that larger companies had already digitalised their tax.

ABAB’s Rebecca Benneyworth did not think that leaving the basis period as it was would undermine the roll-out of MTD. FSB’s Mike Cherry quoted FSB data that showed 70 per cent of small businesses had switched to MTD, at considerable additional cost to businesses. He argued that smaller businesses always needed longer to adapt to any tax change.

Tax year end date

Dodwell stressed that the tax year end date should not be moved until MTD had been introduced. “We do not think there is enough time, given the planning and the systems changes that would be needed, both in the public sector and in the private sector, to allow for that change to take place beforehand,” he told peers.

Benneyworth saw a rationale for shifting the tax year end date but acknowledged that there would be significant barriers to this for some businesses. She thought that forcing all businesses to move their tax year end date would introduce complications for a minority.

Basis period reform – the policy

Dodwell turned to basis period reform, which he argued ‘should not go ahead’ in its proposed form. He expressed concern that businesses would have to apportion their profits across two tax years, risking complications and errors. He told Lib Dem Baroness Kramer that the majority of the self-employed would not be affected by basis period reform, as they used the proposed date already, but that most larger professional services organisations would be ‘badly affected’. Nevertheless, he predicted that the planned introduction of the new basis period system would place undue burdens on some businesses and on HMRC.

IPSE’s Andrew Chamberlain speculated that there could be technical issues if the date HMRC were using did not match that in the tax software a company used for reporting. 

To a question from the Chair on whether Benneyworth, Chamberlain and Cherry were supportive of the change to the tax basis period, all three answered ‘no’. None of the three regarded the reforms as an overall simplification. Benneyworth thought we may be “exchanging some complexity for some different complexity.”

To a question on the economic sectors likely to be particularly hit by the basis period reform, the witnesses offered farming and tourism.

Basis period reform - the timetable

Malcolm Gammie of the TLRC stated the need to allow businesses time to adapt. He said he feared a situation where VAT and income tax periods were out of sync. Gammie described the original timetable as ‘amazingly short’.

Benneyworth expressed relief to Lord Bridges at the ‘very welcome’ delay, saying that tax advisers and businesses were having to handle a lot of change at the same time. Chamberlain stressed he did not object to the changes, but questioned whether a longer implementation time might be needed.

Baroness Harding of Winscombe (Conservative) noted that additional profits brought into scope through the apportionment would be permitted to be spread over the subsequent five tax years, prompting Cherry to say that any delays would help give smaller businesses time to understand the consequences. He wished to see the five-year period elongate, stating that some SMEs would also be paying off debts accrued during the pandemic over the same period. Chamberlain considered five years to be sufficient. Benneyworth agreed, noting that larger companies had tax reserved anyway.

Baroness Kramer asked whether there was sufficient tax advice capacity in the UK. Benneyworth cautioned that financial advisers and accountants could be put under ‘a lot of extra strain’, but that the ability to shift reporting back a year would help spread this workload.

Basis period reform and MTD – HMRC preparedness and communications

Asked by the Chair how well prepared HMRC was for the changes, Benneyworth said she was unaware of any specific team to contact, despite a need for one.

Cherry spoke of ‘ongoing and good engagement’ with HMRC over MTD in general.

Conservative peer Baroness Noakes asked what information needed to be made available to businesses. Cherry urged HMRC to ensure that guidance be delivered ‘easily, simply, and well in advance’, through a plethora of communication channels. Benneyworth suggested flagging changes to businesses when they completed their tax return the year before the changes were introduced. Chamberlain noted that only seven per cent of businesses would have to change the tax year basis, so any help should be directed to them. He also mentioned cashflow problems.

Pressed on the role of HMRC, Chamberlain predicted that most businesses seeking help would go to an accountant or financial adviser.

Benneyworth called on HMRC to release data on overlap profits released in the year the switch was made.

Alternative ways of reforming the basis period

Baroness Noakes sought suggestions for a better basis period reform than the one proposed by the Government.

Dodwell said that those registering for tax payments for the first time could be made to set up for a 31 March year end, with possible exemptions for large companies from the US or other countries with other mandatory tax year end dates. He also suggested that tax reporting could be waived for the first year of operation so that payment and assessment were separated out.

Labour peer Lord Monks questioned whether basis period reform was a simplification at all. Dodwell agreed. He saw potential for differentiated treatment of larger companies and relatively low-earning, self-employed persons. Cherry reiterated his support for any measures to simplify the tax system, in the interests of making compliance clearer, but declined to comment on whether the changes under discussion would assist this.

Chamberlain stated that most business owners did not understand overlap relief, as it operated at present, and were reliant on accountants.

Gammie called for clear rules and guidance for people to follow.

Basis period reform - transitional arrangements and risks

Baroness Harding sought an assessment of the transitional arrangements for the basis period change, particularly regarding additional liabilities coming into scope. Dodwell stated that the transition did not do enough to iron out complications, such as the issue of the income tax of retiring partners in a company.

Asked by Kramer whether there was a risk of companies moving abroad, Dodwell did not think the tax changes were sufficient to dissuade organisations staying or setting up in the UK. He did, however, predict challenges and complaints from companies operating in both the UK and one or more other countries, because Britain was unusual in having tax years that ran across two accounting years. Gammie said that many financial firms, for examples, had to be registered in the UK in order to operate here.

Uncertain tax treatment

In reply to a question from Baroness Noakes on the withdrawal of notifications for uncertain tax treatment, Malcolm Gammie said this had not been achieved at all. He urged HMRC to focus on compliance rate, rather than the tax gap itself. It did not make sense to place obligations on all organisations, including compliant ones, in his view. Continuing, he described the tweaked proposals, following consultation, as ‘less bad’ but still not a fundamentally good idea.

Tax gap

Responding to question from Lord Bridges and Baroness Kramer, Gammie explained that it was difficult to confidently compare additional business compliance costs with savings to the Exchequer. He did not expect a significant narrowing of the tax gap because of HMRC’s proposals.

Office for Tax Simplification

Lords Butler and Bridges asked about the relationship between OTS and the Chancellor. Bill Dodwell replied that his organisation gave advice but did not have a formal, decision-shaping role. Pressed, he acknowledged it was rare for the Treasury to proactively seek his organisation’s view on proposals.

By Hamant Verma, CIOT Senior External Relations Officer