Legislation Day 2021

Today is “tax legislation day”, the date on which measures for the next Finance Bill are published in draft to allow time for review and consultation.  So, while nothing announced today will have immediate effect, the various documents do give a good sense of the direction of travel for future changes to the tax system.

The most eye-catching announcement is undoubtedly the proposal that in future all sole trader businesses and partnerships will be taxed by reference to profits earned in the tax year. At present business are, broadly, taxed by reference to the profits of their accounting year, which will often not coincide with the tax year.  This is a major change which will have an impact on all business other than those already drawing up accounts on a tax year basis.  The timescale is very ambitious.  The new regime will be in place for 2023-4 with 2022-3 being a transitional year.  At first glance it appears that there will be winners and losers  -some businesses’ 2022-3 assessment may be based on more than 12 months’ worth of profits, while others may find that they become entitled to use relief carried forward from previous years much more quickly than they might have expected.

The change is best seen as a further step in the move to a  system of tax administration under which reporting and payment will be based on real-time information.  We are not completely there yet, but there is little doubt that this proposal is a significant milestone along that journey.

Many of the other proposals announced this morning are less eye catching and deal with fairly minor technical matters.  But larger businesses will want to study the draft legislation about the requirement to notify uncertain tax transactions to HMRC.  HMRC’s original proposals about what circumstances triggered a notification were much criticised during the consultation process, and there has been a significant rethink, drawing in part on the experience of similar rules in the Australian tax system.  Whether these will be more workable in practice remains to be seen.

Finally, there are yet further proposals to clamp down on promoters of tax avoidance schemes. These include giving HMRC the right to freeze the assets of promoters where it believes that penalties which have been imposed may not be paid; powers to apply to use the insolvency provisions against promoters who are acting against the public interest; and more powers to protect the public by publishing information about particular avoidance schemes and promoters.   Such proposals would have seemed astonishing only 10 years ago, but it is a sign of just how far HMRC’s efforts to clamp down on avoidance have developed that it is highly likely that there will be little resistance to the imposition of these draconian powers.

All of the draft legislation published today is open for consultation until 14 September.  We can then expect a Finance Bill to be introduced in the Autumn.  Whether or not that is combined with an Autumn Budget remains to be seen.  The smoke signals coming out of the Treasury are even harder to read than usual.