2nd Report - Basis Period Reform and Uncertain Tax Treatments

The government's response

What the committee recommended 41

1. 1
   We consider that the consultation on basis period reform was flawed. Conclusion · paragraph 18
2. 2
   We do not consider that a compelling case has been made for basis period reform,... Conclusion · paragraph 25
3. 3
   We consider that the difficulties that estimation and apportionment of profits pose for those businesses... Conclusion · paragraph 33
4. 4
   When this work is completed, but before final decisions are reached about the way forward,... Recommendation · paragraph 34
5. 5
   We recommend that by 5 April 2022 HMRC should commit publicly to providing details of... Recommendation · paragraph 40

See all 41 recommendations and conclusions

Sources

• 2nd Report - Basis Period Reform and Uncertain Tax Treatments ↗The committee's report, parliament.uk
• Government response - basis period reform and uncertain tax treaments ↗The government's response, 2 February 2022, parliament.uk

Recommendations and conclusions 41

1. 1
   We consider that the consultation on basis period reform was flawed. Conclusion · paragraph 18 Conclusion (the committee's words)

   We consider that the consultation on basis period reform was flawed. In particular, it remains unclear why after four years since the original consultation the new and different basis period reform proposals were published in haste.
2. 2
   We do not consider that a compelling case has been made for basis period reform,... Conclusion · paragraph 25 Conclusion (the committee's words)

   We do not consider that a compelling case has been made for basis period reform, either as a simplification or as an essential prerequisite for introducing MTD for income tax.
3. 3
   We consider that the difficulties that estimation and apportionment of profits pose for those businesses... Conclusion · paragraph 33 Conclusion (the committee's words)

   We consider that the difficulties that estimation and apportionment of profits pose for those businesses which cannot, or cannot sensibly, align their accounting periods with the tax year were not thought through adequately in the design of the basis period reform. We welcome the Government’s recognition that further work needs to be done on how the adverse effects of basis period reform on these businesses might be mitigated. However, we are concerned that tackling this complexity may itself generate further complication to the tax system.
4. 4
   When this work is completed, but before final decisions are reached about the way forward,... Recommendation · paragraph 34 Recommendation (the committee's words)

   When this work is completed, but before final decisions are reached about the way forward, we recommend a reassessment of the additional compliance costs which businesses in this position will bear as a result of the reform.
5. 5
   We recommend that by 5 April 2022 HMRC should commit publicly to providing details of... Recommendation · paragraph 40 Recommendation (the committee's words)

   We recommend that by 5 April 2022 HMRC should commit publicly to providing details of overlap relief from their records for those businesses that need it and, where a specific record is not available, reconstruct the amount available from the information HMRC has.
6. 6
   Our witnesses voiced a number of valid concerns about the additional tax liabilities some businesses... Recommendation Recommendation (the committee's words)

   Our witnesses voiced a number of valid concerns about the additional tax liabilities some businesses could face on the transition to the new basis period rules, and made some suggestions about how these might be mitigated, which the Government should consider. ( Paragraph 45)
7. 7
   While noting the resources that HMRC has assigned to the implementation of this policy, we... Recommendation · paragraph 53 Recommendation (the committee's words)

   While noting the resources that HMRC has assigned to the implementation of this policy, we recommend that the Government and HMRC review the resources required for basis period reform and Making Tax Digital for income tax, in order to maximise the chances of a smooth implementation. In particular, we recommend specific resources should be allocated to retrieving and providing information about overlap relief to relevant businesses.
8. 8
   We recommend that HMRC contacts directly all taxpayers with accounting periods which are not aligned... Recommendation · paragraph 55 Recommendation (the committee's words)

   We recommend that HMRC contacts directly all taxpayers with accounting periods which are not aligned with the tax year to alert them to the change and its implications for them and to inform them of what support is available.
9. 9
   HMRC should issue comprehensive guidance about basis period reform by 5 April 2022, including details... Conclusion Conclusion (the committee's words)

   HMRC should issue comprehensive guidance about basis period reform by 5 April 2022, including details of how unrepresented taxpayers can obtain support, and make a helpline number available. ( Paragraph 56)
10. 10
    We note the OBR’s statement that, in the short term, basis period reform will raise... Conclusion · paragraph 62 Conclusion (the committee's words)

    We note the OBR’s statement that, in the short term, basis period reform will raise revenue. Irrespective of the “fiscal illusion” that may exist in the long term, in the short term those businesses affected will pay extra tax.
11. 11
    The impact of basis period reform on those businesses which are not able to align... Conclusion · paragraph 63 Conclusion (the committee's words)

    The impact of basis period reform on those businesses which are not able to align their accounting periods with the tax year, for sound commercial reasons, has not been sufficiently addressed. We are particularly concerned about smaller businesses, especially those of a seasonal nature such as those in the agricultural sector and tourism. We have questioned the wisdom of introducing both basis period reform and MTD at a time when many businesses are recovering from the economic impact of Covid.
12. 12
    In the course of our inquiry we encountered a formidable body of opinion from stakeholders... Conclusion · paragraph 64 Conclusion (the committee's words)

    In the course of our inquiry we encountered a formidable body of opinion from stakeholders that the basis period reforms should be dropped, or not go ahead in their present form. The strongly held views of key stakeholders should give the Government pause for thought.
13. 13
    While we are not satisfied that the case has been made for basis period reform... Conclusion · paragraph 65 Conclusion (the committee's words)

    While we are not satisfied that the case has been made for basis period reform as a simplification, we do not recommend that the reform should be abandoned now. We note and welcome the Government’s recognition that further work is needed on mitigating the effect of basis period reform on those businesses affected; in particular, specific action must be taken now to reflect the administrative burden they face.
14. 14
    We therefore recommend that, for those businesses which do not have a 31 March–5 April... Conclusion · paragraph 66 Conclusion (the committee's words)

    We therefore recommend that, for those businesses which do not have a 31 March–5 April year end , Making Tax Digital should be deferred until at least 2025–26 . This is also the earliest date at which partnerships—which are disproportionately represented in this group of businesses—are due to be brought into MTD. For the largest partnerships which are particularly adversely affected by basis period reform, no date for the implementation of MTD has yet been set.
15. 15
    While it is positive that HMRC engaged constructively with business on this measure over the... Conclusion · paragraph 80 Conclusion (the committee's words)

    While it is positive that HMRC engaged constructively with business on this measure over the last year, we are disappointed that the Government did not make better use of the opportunity afforded by the delay to this measure to bring greater clarity as to why the new requirement is needed.
16. 16
    We remain of the view that a Stage 1 consultation should have been undertaken in... Conclusion · paragraph 81 Conclusion (the committee's words)

    We remain of the view that a Stage 1 consultation should have been undertaken in relation to this measure. As a result of carrying out a second Stage 2 consultation, we consider that the Government continued to focus on one specific proposal, rather than giving proper consideration to alternative ways of addressing uncertainty within the tax system as a Stage 1 consultation would have required.
17. 17
    Although we acknowledge that the measure has improved as a result of the further consultation,... Conclusion · paragraph 82 Conclusion (the committee's words)

    Although we acknowledge that the measure has improved as a result of the further consultation, we are nonetheless concerned that so many of the criticisms and concerns we heard last year have been repeated in evidence to this inquiry.
18. 18
    We agree with our witnesses that the case for requiring large businesses to notify HMRC... Conclusion · paragraph 96 Conclusion (the committee's words)

    We agree with our witnesses that the case for requiring large businesses to notify HMRC of uncertain tax treatment has still not been made.
19. 19
    Given what HMRC has told us about its strategy around large business compliance we are... Conclusion · paragraph 97 Conclusion (the committee's words)

    Given what HMRC has told us about its strategy around large business compliance we are concerned that, rather than level the playing field in terms of compliance, this measure will have a disproportionate effect on those businesses that already strive to have a collaborative relationship with HMRC in which they discuss uncertain tax matters.
20. 20
    We remain of the view that it is both unnecessary and counter-productive to make a... Conclusion · paragraph 98 Conclusion (the committee's words)

    We remain of the view that it is both unnecessary and counter-productive to make a requirement to notify uncertain treatment apply to all large businesses, regardless of their risk status. We are disappointed that, notwithstanding further consultation, the measure remains neither appropriately targeted nor proportionate.
21. 21
    For low-risk businesses, we are unconvinced that providing a clearer framework around what HMRC considers... Conclusion · paragraph 99 Conclusion (the committee's words)

    For low-risk businesses, we are unconvinced that providing a clearer framework around what HMRC considers a tax uncertainty supports the imposition of a new statutory obligation and the related risks and costs that brings. In our view, further clarity for businesses as to what HMRC wants to be told would be better provided through a non-legislative solution.
22. 22
    That said, given the Government is determined to press ahead with this measure, the rest... Conclusion · paragraph 100 Conclusion (the committee's words)

    That said, given the Government is determined to press ahead with this measure, the rest of this report covers how we think the measure itself might be improved, and its implementation made as smooth as possible.
23. 23
    We acknowledge that HMRC has sought, through consultation, to make the test for uncertainty more... Conclusion · paragraph 115 Conclusion (the committee's words)

    We acknowledge that HMRC has sought, through consultation, to make the test for uncertainty more objective. However, we remain concerned that the application of the proposed second trigger still imposes a significant burden on businesses in practice. There needs to be greater clarity for businesses seeking to identify a “known view”. Any list of sources should be exhaustive, and preferably fixed in legislation.
24. 24
    The operation of the second trigger is dependent on HMRC’s published guidance being clear, unambiguous... Recommendation · paragraph 116 Recommendation (the committee's words)

    The operation of the second trigger is dependent on HMRC’s published guidance being clear, unambiguous and up- to- date. The Government must ensure that sufficient resources are made available to HMRC to ensure that its published guidance is updated on an ongoing basis.
25. 25
    HMRC guidance is no substitute for law. Conclusion · paragraph 117 Conclusion (the committee's words)

    HMRC guidance is no substitute for law. We are concerned as to the extent to which HMRC appears to be relying in its own guidance to solve issues of uncertainty created by the legislation for the new notification requirement. This adds further uncertainty and complexity to a tax system that is already complex.
26. 26
    We agree with our witnesses that the proposed third trigger was too subjective. Conclusion · paragraph 118 Conclusion (the committee's words)

    We agree with our witnesses that the proposed third trigger was too subjective. We welcome the Government’s decision not to proceed with it at this stage.
27. 27
    We recommend that, before legislating for this third trigger, an evidence-based evaluation of the measure... Recommendation · paragraph 119 Recommendation (the committee's words)

    We recommend that, before legislating for this third trigger, an evidence-based evaluation of the measure in its current form be carried out to identify whether it does indeed deliver the benefits that HMRC tells us it is expecting. We also recommend that, if such an evaluation shows that the requirement is not delivering the benefits that HMRC expects, then the notification requirement in its entirety should be repealed.
28. 28
    We are concerned about the extent of the disconnect between HMRC’s view as to compliance... Conclusion · paragraph 127 Conclusion (the committee's words)

    We are concerned about the extent of the disconnect between HMRC’s view as to compliance burden for businesses under this new requirement and what our witnesses told us. Whilst we did not receive evidence on the specific amount of additional costs that businesses will incur, we consider that there is a material risk that HMRC has underestimated what businesses will have to do and that the Government’s cost estimates understate the true cost to business of this measure.
29. 29
    Even if HMRC’s cost estimate is accurate, it puts the costs of ongoing compliance for... Conclusion · paragraph 128 Conclusion (the committee's words)

    Even if HMRC’s cost estimate is accurate, it puts the costs of ongoing compliance for large business at around 10 per cent of projected yield. In our view, this is disproportionate.
30. 30
    Whilst we acknowledge that the Covid-19 pandemic created challenges for HMRC, we are concerned to... Conclusion · paragraph 135 Conclusion (the committee's words)

    Whilst we acknowledge that the Covid-19 pandemic created challenges for HMRC, we are concerned to hear that large businesses still find it difficult to get a sufficient level of engagement with their customer compliance managers. We consider that the number of CCMs needs to be expanded irrespective of the introduction of the new uncertain tax treatment notification requirement.
31. 31
    We are concerned that HMRC has underestimated the number of notifications it is likely to... Conclusion · paragraph 136 Conclusion (the committee's words)

    We are concerned that HMRC has underestimated the number of notifications it is likely to receive. To ensure that notifications can be kept at a manageable level, it is critical that businesses have the opportunity to discuss uncertainties with HMRC in real time.
32. 32
    All businesses affected by this measure must be supported appropriately by HMRC. Recommendation · paragraph 137 Recommendation (the committee's words)

    All businesses affected by this measure must be supported appropriately by HMRC. We have concluded previously that, should this proposal go ahead, the Government should commit to ensuring that every business affected had a customer compliance manager. Our view has not changed. Requiring a business to make an online request for a discussion with an HMRC officer falls short of the support required.
33. 33
    It is disappointing that a measure that we are told is intended to assist HMRC... Conclusion · paragraph 140 Conclusion (the committee's words)

    It is disappointing that a measure that we are told is intended to assist HMRC resolve uncertainty in the tax system is itself uncertain. If this measure is introduced, we consider that it is incumbent on HMRC to ensure that the issues identified by our witnesses are properly addressed in final guidance.
34. 34
    The publication of final guidance on the new requirement must be prioritised so that it... Conclusion · paragraph 141 Conclusion (the committee's words)

    The publication of final guidance on the new requirement must be prioritised so that it is available to businesses well in advance of 1 April 2022 to help them prepare for this new obligation. It is vital that this guidance is clear and unambiguous.
35. 35
    We heard much criticism of the way HMRC has handled these two major changes. Conclusion · paragraph 148 Conclusion (the committee's words)

    We heard much criticism of the way HMRC has handled these two major changes. We acknowledge that few changes to taxation are ever welcome, and that the Covid-19 pandemic has created new challenges for HMRC. But we are struck that, in both cases, the Government has had to extend the original timetables for implementation. This is due, in part, to the Government not following the recommended process for consultation. Consequently, proposals are made which the Government has had to revise, often more than once, which causes unnecessary uncertainty and confusion. This “start—stop” approach to policy risks alienating the people who will be impacted by the changes; and diminishing the reputation of, and trust in, HMRC.
36. 36
    We believe that some of the problems and challenges with the measures discussed in this... Conclusion · paragraph 149 Conclusion (the committee's words)

    We believe that some of the problems and challenges with the measures discussed in this report could have been foreseen at an earlier stage if the Government had followed the consultation processes set out in its own tax policy framework in full. In particular, the omission of Stage 1 risks a consultation process founded on the premise that the best solution to a problem has already been found.
37. 37
    We recommend that in future all consultations involving a significant reform of the tax system... Recommendation · paragraph 150 Recommendation (the committee's words)

    We recommend that in future all consultations involving a significant reform of the tax system should begin at Stage 1 and invite the Government to make a renewed commitment to that effect.
38. 38
    The evidence we heard about current service levels within HMRC is troubling. Conclusion · paragraph 153 Conclusion (the committee's words)

    The evidence we heard about current service levels within HMRC is troubling. We anticipate that the additional demands on HMRC arising from the proposals discussed in this report will only serve to exacerbate the situation.
39. 39
    We recommend that the Government commission an independent report on HMRC customer service levels and... Recommendation · paragraph 155 Recommendation (the committee's words)

    We recommend that the Government commission an independent report on HMRC customer service levels and capacity. The report should separately consider HMRC’s performance in terms of its existing commitments and responsibilities to taxpayers and what will be needed in terms of additional resourcing for it to be able to deliver basis period reform and MTD for income tax without any adverse effect on overall service levels.
40. 40
    Significant changes to tax rules need a reasonable lead-in period so that businesses have the... Conclusion · paragraph 161 Conclusion (the committee's words)

    Significant changes to tax rules need a reasonable lead-in period so that businesses have the time they need to prepare. The scale of the impact of new proposals on businesses, especially small business, does not seem to be well understood by HMRC.
41. 41
    We consider that the Government should be more mindful of the need to factor in... Recommendation · paragraph 162 Recommendation (the committee's words)

    We consider that the Government should be more mindful of the need to factor in appropriate lead-in times in its policy proposals and that HMRC should provide a clear roadmap on “what has to be done” and “by when” to help businesses to prepare.