New HMRC tax proposal could mean more complexity for LLPs and the self-employed
HMRC’s latest proposal to shift the taxation basis could make life much more complicated for partnerships, limited liability partnerships and self-employed individuals – says Kate Arnott at MHA.
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 current year basis (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. This will look first to the tax year in question and then time apportion the accounts so that the profits attributable in that period are taxed in the same tax year – referred to as a change in taxation basis (CITB).
Successive governments have championed the merits of a level playing field for tax – your business structure should not impact how much tax you pay and when. However, the CITB proposal 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 partnerships and self-employed taxation
The CITB accelerates when tax is paid for non-company businesses with a year-end other than 31 March. We are told the government is considering a spreading provision, under which the profit that is brought into charge in the transition from CYB 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. The assumption is that one-fifth 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 it belong when looking at a partnership? The concept of partnership taxation is that the profits chargeable are apportioned between partners in profit-sharing ratio, posing the question of whether incoming partners get to ‘share’ in the tax-charge for profit periods when they were not partners, or whether departing partners retain liability. The mechanics of overlap relief also raise potentially serious issues, where tax will be accelerated and due at a higher rate.
At a time when pledges have been made not to change rates for 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 and a further move away from any semblance of a level playing field. The 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 31-March year-end.
Experts at MHA have considered the proposed changes in detail and have set out some of the challenges it will raise. You can read the full article here.
