Are you Ready for the Upcoming Tax System Changes like Basis Reform?

With several significant tax system changes on the way like the basis reform, now is the time to check how these will affect your business.

 (L to R) Mark McCluskey, FPM Senior Tax Manager with Malachy McLernon FPM Partner and Head of Corporate & Indirect Tax

Are You Ready for the Basis Period Reform?

The basis period is the accounting period on which businesses calculate their tax each year. Until now, tax was calculated on a current year basis (in other words the 12-month accounting period that ends in the current tax year). In future, however, all unincorporated businesses, including sole traders, partnerships and LLPs, will have to use the tax year as their basis period. For some businesses, this will mean reporting profits for more than a 12-month period. Transitional arrangements are in place for 2023/24 and overlap relief will be available. HMRC have committed to providing information on this from this month onwards.

Given the potential for some taxpayers to incur substantial tax bills if their basis period changes, HMRC have said they will allow the tax on additional profits brought into the 2023/24 tax year to be spread over five tax years.

Note that if your current accounting year-end is 31 March/ 5 April, this basis period change will have only a minor impact.

Prepare for MTD for Self-Assessed Income Tax

Following the successful implementation of Making Tax Digital (MTD) for VAT in recent years, MTD for Income Tax Self-Assessment (ITSA) is due to come into effect on a phased basis from 2026. The first taxpayers to be affected will be businesses, self-employed individuals, and landlords with income over £50,000.

From 6 April 2026, these taxpayers will be required to keep digital records and use MTD-compatible software when submitting data to HMRC. MTD for ITSA will then roll out to taxpayers with income over £30,000 from April 2027.

If you are a self-assessed taxpayer in either of these categories, now is the time to check when and how you will be affected by the new requirements so that you can ensure your systems and processes will be ready in time.

Other ITSA entities

Meanwhile, we understand that the Government is reviewing the needs of smaller businesses—particularly those under the £30,000 threshold—before deciding whether and how MTD for ITSA can be shaped to enable these entities to fulfil their Income Tax obligations.

As regards partnerships, while Government remains committed to introducing MTD for ITSA to these entities, the implementation date has yet to be decided. HMRC have said that general partnerships will not come within scope of the new regime in 2025.

Penalty System

The implementation of MTD outlined above will be accompanied by a penalty system change, which will harmonise Income Tax late submissions and late payment penalties with those that apply under MTD for VAT. This will take effect for taxpayers when they join MTD for ITSA. A revised penalty system for taxpayers who fall outside the scope of MTD for ITSA is expected to follow in due course.

Inheritance Tax

While there is considerable speculation that Inheritance Tax may be scrapped ahead of next year’s General Election, it may prove difficult for Government to balance the books if they get rid of a tax that yielded £7.1bn in 2022/23. As always, it is important to monitor developments and anticipate how any forthcoming changes will impact your business.

Digital Disclosure

While HMRC continues to offer companies and individuals the opportunity to disclose errors across all the main tax heads, particular care is needed when availing of this process. Where penalties apply, these will be based on HMRC’s view as to whether the behaviour that gave rise to the error was deliberate or due to carelessness. HMRC has significant access to third party information and may use “nudge letters” to prompt anyone they suspect of having tax irregularities to come forward. Before making a disclosure, it is advisable to seek professional advice. This is particularly important if you receive a nudge letter.

HMRC Postal Delays

A significant backlog of postal queries has prompted HMRC to introduce a chat facility which taxpayers can access from within their personal account. While the intention is to improve the turnaround time for tax queries, IT constraints appear to be limiting the usefulness of this facility at present. HMRC have signaled their intention to ring-fence resources over the coming months to improve the service.

For further information and/or advice on the changes highlighted in this article, contact our tax team.