Proposed change of taxation basis
HMRC consultation paper proposing a change in basis period for the self-employed, partnerships and LLPs
In July 2021 HMRC issued a consultation paper proposing a change in the basis period for the self-employed, partnerships and LLPs. At a very simple level, it is proposed that the basis of taxation be changed from the CYB that has been with us for the last 25 years or so, to what will be termed an earnings basis, or tax year basis i.e. look first to the tax year in question and then time apportion the accounts so that the profits attributable to that tax year are taxed in that tax year. This is referred to as the Change in Taxation Basis (“CITB”).
Successive Governments have championed the merits of a level playing field for tax i.e. your business structure should not impact upon how much tax you pay and when. However, the CITB proposal, as matters stand, suggests a move away from the level playing field concept (to the extent that it has ever really existed) as small businesses operating other than through companies will pay tax earlier than their company equivalents.
Impact on Partnership / self-employed taxation
The CITB accelerates when tax is paid for non-company businesses with a year-end other than 31st March. We are told that Government is considering a spreading provision under which the profit that is brought into charge in the transition from CYB (it is assumed net of overlap relief released) may be taxed over five years. The basis of the spreading charge is not clear (and indeed it is noted only as being a consideration). It is assumed that 1/5th of the net profit would be taxed in each of the tax years 2022/23, 2023/24, 2024/2025, 2025/26 and 2026/27.
The question that the spreading charge raises is to whom does the spreading charge belong when looking at a partnership? The concept of partnership taxation is that the profits chargeable are apportioned between partners in profit sharing ratio and therefore the question arises as to whether incoming partners get to “share” in the tax charge for profit periods that they were not partners or whether departing partners retain liability. Because of the mechanics of overlap relief, there are also potential serious issues arising, where tax will be accelerated and due at a higher rate.
At a time when pledges have been made not to change the rates of many of the taxes that raise the most money for the Government, the temptation is obviously compelling to accelerate tax payments to an earlier year, at the cost of further complexity in the tax system, and a further move away from any semblance of a level playing field. This proposed CITB is in no way a simplification of the tax system. It grossly complicates the taxation of any non-company business that does not have a 31st March year-end.
Experts at MHA have considered the proposed changes in detail and have set out some of the challenges it will raise.