Chartered Institute of Taxation shares Lords committee’s worries about tax reporting reform

The Chartered Institute of Taxation (CIOT) welcomes recommendations in a House of Lords report published today (15),¹ including that more work needs to be done on the impact basis period reform will have on businesses unable to align their accounting period with the tax year.

CIOT also welcomes the peers’ recommendations on uncertain tax treatment, including that all businesses in scope for this measure should have access to a customer compliance manager. If HMRC need more resources to achieve this, CIOT believes that would be a worthwhile investment.

The recommendations are made in a report from the Lords’ Economic Affairs Committee’s Finance Bill Sub-Committee on measures in Finance Bill 2021-22, which focuses on basis period reform and notification of uncertain tax treatment. Basis period reform changes how partners and sole traders calculate their taxable profits each year if their accounting period does not follow the tax year. The separate notification of uncertain tax treatments measure will mean, as a large business, you will need to tell HMRC if you adopt an uncertain tax treatment.

Commenting on the report’s recommendations on basis period reform, John Cullinane, CIOT’s Director of Public Policy, said:

“We strongly endorse the peers’ conclusions that significant reforms of this nature should be subject to so-called ‘Stage 1’ consultation – in which the Government sets out its objectives and invites wide-ranging comments on alternative ways of meeting them. Because this stage was skipped, attention focussed on a particular proposal before its impact on different taxpayers could be assessed. We agree that, even now, more work is required on its impact.

“The basis period reform is a simplification for those who can adopt a 31 March or 5 April year end, but those businesses who cannot risk trading one set of complexities for another.

“We would also like to see greater efforts made by HMRC to identify the numbers and typical characteristics of businesses affected and whether they are likely represented by tax advisers or unrepresented, not least to ensure HMRC’s communications are well targeted.”

On the report’s recommendations on notification of uncertain tax treatments, John Cullinane said:

“We are pleased that the peers share our doubts as to whether this measure is needed – or will work as the Government intend. But given the Government seems determined to press ahead with it the sub-committee is right to look at how the measure itself might be improved, and its implementation made as smooth as possible.

“One way this could be done is, as the peers say, to ensure that all companies within the scope of this measure have access to a customer compliance manager. We also agree that, as per our submission to the inquiry, the Government must ensure that HMRC has the resources to ensure published guidance is comprehensive, clear and up to date.

“Additionally, the peers are right to say that the scope of this measure should not be expanded to any ‘third trigger’ of uncertainty without there first being an evidence-based evaluation of the measure. Open and transparent post-implementation review should be the norm in a well run tax system, not a rare exception.

“More broadly the peers are right to say that (as with the basis period reform), consultations on reforms of this nature should start at ‘stage 1’. For this measure that would have meant a broad-based consultation on how reducing the legal interpretation tax gap (the declared aim of this measure) can most effectively be achieved. To engage in such a discussion, it would be helpful to have more clarity about what the legal interpretation tax gap actually represents and how it is calculated.”

John Cullinane added:

“Much of the concerns of peers apply more widely to the way changes are handled rather than just the basis period reform and uncertain tax treatments that they looked into for this important inquiry. HMRC need to do more to explain the reasons and motives for change, and to consult properly on changes far ahead of any implementation. We share the peers’ recommendation that HMRC provide businesses with a clear roadmap of what must be done and by when.”