Child Benefit is paid upon a claim to the parent or carer of a child up to the age of 16, or 20 if in approved education or training.

The HICBC, introduced in January 2013, remains a prime example of how not to design and operate a tax. As a reminder, the aim of HICBC is to make any Child Benefit recipient repay some or all of their Child Benefit back (as tax) if they or their partner has an individual adjusted net income exceeding £50,000 per year. The repayment is at the rate of 1% of total benefit paid for each £100 of income above the threshold, up to £60,000, at which point the tax charge matches the total benefit.

The Low Incomes Tax Reform Group (LITRG) has published a warning to separated couples following a recent First-tier Tribunal decision (Meades v HMRC) that a parent was liable for the HICBC, despite the fact that the benefit was paid to their former partner. In this case, Mr Meades had separated from his ex-wife in 2017. He was found liable for a £1,076 HICBC for the 2019/20 tax year even though the Child Benefit payments were made to his ex-wife, because he was the Child Benefit claimant, and, in that tax year, his adjusted net income was higher than £50,000.

The LITRG has also been contacted by others in a similar position and has published information on what claimants can do if faced with this situation.

Child Benefit is always claimed by an individual, not a couple. The claimant is the person who completes and signs the form to make the claim, even if they choose for their partner to receive the benefit payments. As some years may have passed between the original Child Benefit claim being made and the separation, it’s possible that people may have forgotten who the claimant originally was and assume it is the person getting the payments.

If a couple separates, the claimant could become liable for the HICBC if their adjusted net income later exceeds the £50,000 threshold, even if the payments are paid into their former partner’s account. It is also possible that any new partner of the claimant might become liable to the HICBC if they exceed the threshold and are the higher earner, even if they had nothing to do with the original claim. This is because the way the charge is worked out initially looks at the adjusted net income of the person who made the claim and any partner they have. (A ‘partner’ for HICBC purposes means a spouse or civil partner (unless separated), or someone with whom the person is living together as if married or in a civil partnership).

The LITRG is urging child benefit claimants to review their Child Benefit arrangements if they have separated from the partner they had when the claim was originally made. In doing this, claimants should check that these arrangements continue to be appropriate to their circumstances and to avoid being unwittingly exposed to the HICBC.

Some separated couples may decide they want the person who made the original claim to continue doing so, even if the Child Benefit payments are being paid to the other parent or carer (for example, a claimant who is not receiving the payments themselves may require the National Insurance credits awarded with a Child Benefit claim for their own State Pension), while others may seek a new arrangement – particularly in cases where the HICBC would otherwise be payable by the claimant.

The LITRG says that it understands that it is not possible to retrospectively change the name of the person claiming Child Benefit to avoid the HICBC, but it is possible to end the claim for Child Benefit and for the former partner to make a new claim. However, this could mean that the former partner (or any new partner they may have) may be liable to the HICBC themselves if they earn above the HICBC threshold.

If taxpayers are found to be liable for the HICBC, but have failed to notify HMRC, they may be charged penalties – although, if they have a reasonable excuse for the failure then the penalties can be appealed.

Claiming child benefit can also impact a person’s entitlement to a State Pension, as it attracts National Insurance credits. While these can be transferred to the other parent or carer, deadlines and conditions apply.

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Since 6 April 2023 no lifetime allowance (LTA) charges apply. All other aspects of the LTA framework have remained in place. However, where there is an excess, either a nil charge applies or the excess is subject to income tax at the individual’s marginal rates.

HMRC are now working on trying to deliver the more complex task of abolishing the LTA altogether from 6 April 2024.

The removal is complicated by the limits on tax-free cash and other tax-free lump sum payments, such as death benefits for those who die under the age of 75. The tax-free element of these payments are currently limited and calculated by reference to the individual’s available LTA. If the LTA is abolished, something else needs to be introduced to replace it.  

In July 2023, HMRC issued a policy paper, some draft legislation and Pension Schemes Newsletter 152 all covering the proposed amendments and their progress to date. Together, they give a good idea of how the process may work but there are still several key issues to resolve and further clarity is required.

Limits on tax-free lump sums

The plan is to introduce two limits on pension payments that can be made free of tax:

• An overall limit of lump sums and lump sum death benefits of £1,073,100.
• A tax-free cash limit of £268,275. This will count towards the overall limit above and will include the tax-free element of uncrystallised funds pension lump sums.

Anything above these limits will be paid subject to income tax at the member or beneficiary’s marginal rates. 

Where LTA protections apply, these will increase the limits in the same way as they do currently. 

Valuations

At high level, the limits are probably what most people expected. However, it is not clear how any previous tax-free cash payments will be valued and accounted for. The policy statement says that HMRC’s intention is not to change the approach that schemes currently take to valuing benefits. However, as the benefits have all previously been calculated by reference to the LTA, it is not clear how schemes will operate the new rules. 

The limit will also include small pots, winding up lump sums and trivial commutation payments which seems an unnecessary complication and one area that HMRC may review.

Hopefully, the valuation issues can be clarified but it is going to be difficult to achieve and implement any changes by 6 April 2024.

Death benefits

The bigger issues appear to be around the potential change in death benefits. Whilst there is nothing in the draft legislation, the policy paper states that death benefits currently paid in the form of income “will no longer be excluded from marginal rate income tax under ITEPA, with effect from 6 April 2024”. Whilst some may have expected the tax-free amount to be limited to £1,073,100, it will come as a shock to many that potentially all death benefits paid as income will now become taxable. The change doesn’t seem to match the policy intention and may well be a mistake. 

Another change in relation to death benefits relates to crystallised funds lump sum death benefits. Currently, these are not tested against the LTA and, so, any crystallised funds paid as a lump sum would be free of tax if the member dies under the age of 75. The proposed changes (if enacted) would mean that all lump sum death benefits will be tested against the £1,073,100 lump sum limit and any excess will be subject to income tax. The logic of this change is that the crystallised funds will not have previously been tested once the LTA is removed.  

Summary

In the current tax year, we still have the LTA framework in place and no LTA charges apply. It is not a perfect situation but is a system that works, one that schemes can implement and it meets the overall policy objective. It was always going to be a much more difficult task to remove the LTA altogether. We are now only seven months away from the next tax year and it may be better to delay the removal of the LTA rather than introduce new rules that are both difficult to administer and introduce new forms of unexpected taxation.    

We will provide further updates as and when we get more clarity.

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How the intestacy fixed sum for surviving spouses and civil partners in England and Wales has been belatedly increased to £322,000.

In July, the Government passed a statutory instrument (SI 2023/758) which increased the fixed sum for surviving spouses and civil partners payable under the intestacy regime in England and Wales. The sum increased from £270,000 to £322,000 with effect from 26 July 2023, a 19.3% increase.

This is the net sum that a surviving spouse or civil partner is entitled to receive if a person dies intestate leaving “issue”. Generally speaking, the term “issue” is used instead of “children”, but “issue” has a wider meaning and includes the lineal descendants, i.e. children, grandchildren, etc.

The change seems to have flown under many people’s radars, not least because the Ministry of Justice (MoJ) chose not to issue any press release. Dig a little and an interesting story emerges which explains – but does not justify – the MoJ’s reticence:

• Schedule 1A of the Administration of Estates Act 1925 requires the level of the fixed sum to be increased in line with the rise in the CPI:
• every five years (as last happened in February 2020); or, if earlier,
• when the CPI has risen by over 15% since the previous increase.
• The 2020 increase was based on November 2019 CPI and the 15% threshold was triggered by the October 2022 CPI, which was published on 16 November.
• Paragraph 4 of Schedule 1A says the Lord Chancellor must make an increase Order to raise the fixed amount within 21 days of the 15% threshold being crossed.
• However, the relevant Order was not set before parliament until 5 July 2023, 231 days after the CPI was announced.
• It appears that the £322,000 figure was based on the March 2023 CPI, issued on 19 April. The latest CPI (for June) would have yielded a figure £6,000 higher.
• The Explanatory Memorandum to SI 2023/758 gives no clue to the seven-month delay, merely referencing the 15% threshold as a reason for its issue.
• The cross-party House of Lords Secondary Legislation Scrutiny Committee picked up the MoJ’s ‘inexcusable error in timing of the Order’ and the ‘deficient Explanatory Memorandum’ in its recent report on the 2022/23 legislative session. It noted that the ‘MoJ has breached the law requiring it to increase the fixed net sum within the 21-day timeframe’. This may explain the absence of any MoJ press release…

The overdue increase in the intestacy fixed sum serves as another reminder of the impact of the freeze of the nil rate band, something else the Government would probably not wish to highlight. Had the nil rate band been index-linked since its April 2009 freeze began, it would now be around £475,000.

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As announced in May 2023, the Government will extend the pensions cold calling ban to cover cold calling for all consumer financial services and products. Please see our earlier Bulletin.

It has now published a consultation paper seeking views on the design and scope of the ban on cold calling for consumer financial services and products, including a call for evidence on the impacts of the proposed ban. This consultation closes at 9:30am on 27 September 2023.

Under the Financial Guidance and Claims Act 2018, cold calls are already banned from personal injury firms and pension providers (unless the consumer has explicitly agreed to be contacted).

Cold calling is defined by the Government as involving individuals or organisations making unsolicited calls to consumers to market a service or product. In some cases, these calls are made by direct marketing companies in breach of relevant privacy regulations, but in other cases the products and services being marketed do not exist and the call is fraudulent.

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Summary of responses to the consultation on tougher consequences for promoters of tax avoidance.

HMRC has published a summary of responses to its consultation entitled, “Tougher Consequences for promoters of tax avoidance”.

The consultation ran from 27 April 2023 to 22 June 2023 following which HMRC received 19 written responses from representative bodies, professional advisers and individuals, and met with eight representative bodies as part of the consultation.

Having considered these responses, HMRC has published draft legislation and accompanying explanatory notes.

The consultation on the draft legislation will run from 18 July to 12 September 2023.

It sets out proposals for a new criminal offence for promoters of tax avoidance schemes who fail to comply with HMRC’s notice to stop promoting an avoidance scheme and a proposal to expedite the disqualification of directors who promote tax avoidance.

The Government would like views from members of the public, representative bodies, advisers and promoters, as well as businesses and individuals who may have received marketing material, taken advice about, or used arrangements, which seek to avoid tax.

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June’s monthly Government borrowing figures. They included £7bn of downwards revisions which brought year to date borrowing below the Office for Budget Responsibility (OBR)’s projections. However, despite the revisions, total debt for June 2023 is above the 100% of GDP threshold.

On Friday, the Office for National Statistics (ONS) published the monthly public sector borrowing data for June 2023. Like the inflation numbers issued on the Wednesday, the borrowing figures were better than had been expected:

• The public sector net deficit ex banks (PSNB ex) in June 2023 is estimated to have been £18.5bn, meaning it was:

• The third highest June borrowing since monthly records began in 1993;
• £0.4bn less than a year ago;
• £0.1bn greater than in June 2021;
• £13.84bn less than in June 2020;
• £2.6bn below the OBR monthly profile projection; and
• £3.5bn below the Reuters economists’ median forecast.
• The latest estimate of total borrowing for the 2022/23 was revised down by £2.1bn to £132.1bn.
• Overall public sector net debt excluding banks (PSND ex) was £2,596.2bn, equivalent to 100.8% of GDP (up 0.9%). Last month’s initial May figure, which just crossed the 100% threshold, was revised down to 99.9% due to a £6.3bn increase in the GDP estimate outpacing a £0.5bn rise in the debt estimate.
  
  In June 2022, debt was 97.3% of GDP and £171.2bn less in cash terms. When the Prime Minister made reducing the debt/GDP ratio one of his five pledges in early January 2023, the then latest figure (for November 2022) was also 97.3%.

• At £12.5bn, the June 2023 interest payments were £3.7bn higher than May’s figure, but £7.5bn less than a year ago. The interest bill was £1.5bn below the OBR forecast, although it still ranked as the third highest payable in any single month on record.
  
  Total interest three months into 2023/24 amounts to £29.8bn, about 1.2% of GDP. Given the UK saw only 0.2% growth in the year to March 2023, that 1.2% serves as a reminder of how difficult it will be to push down the debt/GDP ratio. As the Institute for Fiscal Studies recently pointed out, the interest burden implies that if it is to stand any chance of cutting the debt/GDP ratio, the Government will need to run a large primary budget surplus, i.e. spend significantly less on everything excluding interest payments than its raises in revenue.
  
• Bank of England holdings of gilts (at redemption value) fell by £7.0bn from April to £695.5bn. The gap between the reserves the Bank created to purchase the gilts under QE and their redemption value narrowed by £0.8bn to £107.7bn (counted as Government debt, as the Treasury indemnified the Bank against losses).

The OBR commentary made the following comments:

• Borrowing in the first three months of 2023/24 totalled £54.4bn, £12.2bn above the same period last year but £7.5bn below the OBR’s monthly profile based on its March forecast. This downside surprise is more than explained by higher central Government receipts (£7.7bn above profile) thanks to surpluses across the three major taxes – onshore corporation tax, VAT, and PAYE income tax and national insurance (NICs) – alongside lower borrowing by local authorities.
• Central Government spending at £4.5bn above profile provided a partial offset to the increased tax receipts. Part of this was attributable to the non-consolidated element of the NHS pay settlement.
• HMRC cash receipts were £4.7bn (8.5%) above the OBR profile in June and were up £3.8bn on last June. This strength is explained by:

• Onshore corporation tax cash receipts were £3.1bn (34.9%) above profile and £3.7bn (45.3%) up on last year.

• Cash VAT receipts £1.2bn (15.0%) above profile and £4.2bn (11.4% per cent) higher than the OBR profile for the first three months of the year.

• PAYE income tax and NICs cash receipts were £0.7bn (2.2%) above profile.

Comment

A second piece of relatively good news for the Chancellor will be welcome relief. However, scope for a tax giveaway alongside the Autumn Statement continues to look minimal.

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The DWP’s trial to encourage low-income pensioners to apply for Pension Credit.

Nearly 1.4 million pensioners across Great Britain receive Pension Credit, but many aren’t claiming this extra financial help. So, two thousand people in Great Britain will receive letters inviting them to apply for Pension Credit as part of a new trial launched on 17 July.

The letters and leaflets will be targeted at households in ten local authorities that are already in receipt of Housing Benefit, but not claiming Pension Credit.

Launched by the Department for Work and Pensions (DWP), the “Invitation to Claim” trial targets those likely to be eligible for Pension Credit – individuals above State Pension Age and in receipt of Housing Benefit.

Pension Credit can be worth over £3,500 per year on average for people over State Pension age and on a low income – and it can lead to further support including extra Cost of Living payments later this year.

The ten local areas selected for the trial have been selected to ensure a representative sample of urban, rural, regional and national areas. Letters and “call to action” leaflets will be sent out in two waves, beginning this week, with a follow up letter to be sent out in August. The ten local authorities chosen for the “Invitation to Claim” trial are:

• Eastbourne
• Teignbridge
• Pendle
• Charnwood
• Vale of White Horse
• Redcar and Cleveland
• Craven
• Harrow
• Powys
• West Lothian

Pension Credit is designed to help with daily living costs for people over State Pension age and on a low income, although they do not need to be in receipt of State Pension to receive it.

The benefit tops up a person’s income to a minimum of £201.05 per week for single pensioners and to £306.85 for couples – or more if a person has a disability or caring responsibilities. For more information, please see Pension Credit.

Even a small Pension Credit award can open doors to other benefits – including help with housing costs, council tax, heating bills, as well as up to £600 in extra Cost of Living payments later this year too.

Pension Credit can be claimed by phone and online, ensuring that older people can apply safely and easily, wherever they are. The online Pension Credit calculator is also on hand to help pensioners check if they’re likely to be eligible and get an estimate of what they may receive.

Applications for Pension Credit can be made:

• On the How to Claim page;
• Over the phone by calling 0800 99 1234 (Monday to Friday 8am to 6pm);
• By printing out and filling in a paper application form.

For more information please visit the Pension Credit GOV.UK page. For extra resources for stakeholders and businesses, the department has also produced a Stakeholder Toolkit. Pensioners can check their eligibility and get an estimate of what they may receive by using the online Pension Credit calculator.

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HMRC’s qualitative research into the experiences and main considerations when choosing and using compatible software for Making Tax Digital (MTD).

HMRC commissioned Kantar Public to undertake qualitative research with businesses to understand the decision-making process around choosing MTD-compatible software, and the levels of satisfaction with that choice from those currently using software. HMRC says that insight from the research will inform its future guidance and support offer for businesses and support HMRC in ongoing collaboration with software developers and vendors. The research looked at:

• the steps involved in choosing MTD-compatible software;
• the key factors and features considered and prioritised by taxpayers;
• the information gaps that prevent businesses from choosing the software that better suits their needs;
• the main sources of dissatisfaction of customers with MTD-compatible software.

The research comprised 50 in-depth interviews and four focus groups with business taxpayers registered for VAT in the UK, currently affected by MTD rules.

Contextual note: This research was carried out in March and April 2022. At this time, MTD for Income Tax Self Assessment (MTD ITSA) was due to be introduced from April 2024 for self-employed individuals and landlords with a gross income of £10,000 and above.

On 19 December 2022, the Government announced a longer period for self-employed individuals and landlords to prepare for MTD. From April 2026, self-employed individuals and landlords with a gross income of more than £50,000 will be required to keep digital records and submit returns using MTD-compatible software. Those with a gross income of between £30,000 and up to £50,000 will be required to do so from April 2027.

And, following the phased approach, the Government will not extend MTD ITSA to general partnerships in 2025. It remains committed to introducing MTD ITSA to partnerships at a later date.

HMRC provides some information on the software available on GOV.UK. However, the feedback has shown that businesses expect more support from HMRC to help them choose the right product.

Participants faced a common set of challenges and information gaps across the process of selecting and using MTD-compatible software. The key challenges and information gaps highlighted by participants at each stage of the decision-making process included:

• confusion about the meaning and implications of MTD at the awareness stage;
• feeling overwhelmed when trying to filter software options;
• a lack of confidence in software choice;
• frustration, after using software, that they had made an inappropriate software choice for the needs of their business.

There were six main considerations that participants prioritised when selecting MTD-compatible software:

1. cost, including upfront and ongoing costs of software and of time;
2. ease of use; specifically, whether MTD-compatible software was easier or as easy as their current record keeping system;
3. recommendations from agents and peers;
4. features, including compatibility with existing systems and accessibility;
5. security and reliability, including data security, customer support and updates;
6. familiarity, including previous experience with software.

Ideally, participants wanted HMRC to provide some guidance on the types of software that might be best suited to a business of their size and type.

Participants also felt that information about the cost of different options could be improved. Some reported that they had looked at options listed as free-to-use which then turned out not be free at all. This created further confusion and frustration for some businesses that were already overwhelmed by choice.

Comment

MTD rules require businesses to keep records digitally and submit tax returns from those records using MTD-compatible software. It may come as a surprise to some taxpayers that HMRC does not, and will not, provide this software.

Also, don’t forget, the basis year change starts with a transitional year in 2023/24. This is seen as a necessary precursor to MTD ITSA. Please see our earlier Bulletin.

Whether there is enough awareness of that reform would also be interesting to know, given that it covers a similar target taxpayer population.

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All the recent changes being implemented to solve the NHS pensions problems.

Whilst there were no new pensions related announcements in the NHS Long Term Workforce Plan published on 30 June, it did make reference to some of the changes that are already in plan. These, along with the pensions tax changes announced in the March 2023 Budget, have seen a significant shift towards resolving many of the key issues facing high earnings members of the NHS pension scheme.

A key stated motive for the increase in the annual allowance and the removal of the lifetime allowance (LTA) announced in the March 2023 Budget was to aid staff retention within the NHS. 

The abolition of the LTA resolves one of these issues entirely. Members can now build up as much pension as possible without fear of an LTA charge. The change removes a significant disincentive to continue working.

However, the annual allowance was often the bigger issue. The increase from £40,000 to £60,000 will help with the problem and ensure many consultants and GPs will not have to face regular annual allowance charges. There are still likely to be spikes in pension inputs above the annual limit caused by things such as the way NHS pay scales reward length of service, and whenever they take on additional pensionable responsibilities. However, the higher annual allowance, coupled with, as time goes by, potentially more carry forward being available, should mean that annual allowance excesses are far less frequent. 

For very high earners there is still the issue of tapering. However, the increase in the Adjusted Income limit will move more NHS workers out of scope. Many NHS workers in this bracket are likely to have an element of private earnings and, in many cases, can control their level of taxable income by using limited companies to perform their private duties.

As well as the increase in the annual allowance there were also a couple of technical changes to the way the pension inputs will be calculated, which aim to further reduce potential annual allowance issues.

The first applies to all public sector pension schemes and will allow negative inputs in a legacy final salary section of the scheme to be offset against the pension inputs in the career average section. Negative inputs can occur where the inflation rate used in the pension input calculation exceeds the annual increase in the pay or revaluation rate used for calculating the final salary benefits.

The second change intends to correct the fact that there is a disconnect between the inflationary offset used in the tax calculations for the pension input calculation and the one used to revalue benefits in the schemes. Without the amendment, the steep rise in inflation would have created some very high pension inputs, which are arguably unfair as the pension input is only supposed to represent the increase in benefits above inflation.

To resolve this, the effective date of the revaluation of Career Average Revalued Earnings (CARE) schemes was moved from 1 April to 6 April with effect from 6 April 2023. For the 1995 scheme and 2008 schemes the date used to revalue lifetime earnings, i.e. the ‘dynamizing factors’, was also moved from 1 April to 6 April. The change to the CARE scheme will impact all members, whereas the change to the older schemes only applies to practitioner earnings. The changes have the effect of aligning the CPI values. This will also mean that the inflationary part of the pension ‘growth’ will now move into the next tax year. So, rather than the increase being reflected in a 2022/23 pension input it will now move to the 2023/24 tax year.  

Tax year 2022/23 will be a transitional year which means, effectively, there will be no revaluation element within the calculations and, so, this should mean lower pension inputs. 

Note, however, there is no change to the calculation for non-practitioner members in the final salary sections of the scheme. The pension inputs will still be based on any increases in their final salary between the start and the end of the pension input periods.

In addition to the tax related changes, new retirement flexibilities have been introduced as a further part of the plan to aid staff retention by offering options that will remove some of the issues within the 1995 section of the scheme that appear to encourage employees to retire early.

From April 2023 – retire and re-join

Under the previous rules, members who took their 1995 benefits were not allowed to build up any further pension in the 2015 scheme. Any further work had to be on a non-pensionable basis.

Members can now retire and take their full benefits from the 1995 scheme, then return to work after a break of at least 24 hours. They can then re-join the 2015 scheme and continue to build up benefits.

This is an important change because there are no late retirement factors in the 1995 scheme and, so, no incentive to continue in the 1995 scheme beyond age 60. Many employees therefore chose to retire at 60. The change removes a key disincentive to work beyond age 60.

However, it will mean those taking their 1995 pension benefits will be subject to high marginal rates of income tax if they are taken before they are actually needed where the member continues in employment.

The previous restriction for ‘retire and return’ workers meant members of the 1995 scheme were limited to working 16 hours a week for the first month after re-employment. This restriction is now removed, and members simply need to take a 24-hour break and can then start building 2015 benefits immediately. Members will, however, be required to enter a new contract of employment. Whilst this will need to be agreed locally with their employer, the Government stated that it would “strongly encourage employers to offer staff the same terms and conditions on this new contract should they decide to retire and return”.

From October 2023 – partial retirement

This new option allows those who have reached the normal minimum retirement age to take between 20% and 100% of their 1995 pension benefits in one or two stages without having to leave their job. They can take the benefits from the 1995 scheme, continue to work and build up benefits in the 2015 scheme.

To take advantage of this option, employees must reduce their pensionable pay by at least 10%. GPs and other practitioners must reduce their NHS commitments by at least 10%.  

Where benefits are taken before the normal pension age for the scheme (age 60 for most, but 55 for certain occupations) the usual early retirement reduction factors will apply.

Comment

The full package of measures undoubtedly improves the position for high earners in the NHS pension scheme. The significant improvement in the tax position along with the additional retirement flexibilities are welcomed and should provide some help with staff retention. The ability to take benefits from the 1995 section of the scheme and continue to accrue benefits in the 2015 scheme without fear of an LTA charge removes a strong incentive to retire at age 60.

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The transitional year of basis period reform is now underway. It will be important to ensure that any available overlap relief is used. However, getting hold of information about overlap relief may be tricky.

We have commented previously about the reforms to the basis year calculations for self-employed sole traders and partners. This tax year, 2023/24, is the transitional year for these reforms. Our most recent Bulletin covered this. Our earlier Bulletin outlined how the reforms will operate, and a subsequent Bulletin added an update on MTD ITSA.

To help explain what is happening this tax year, consider the situation for an individual who has a trading year ending on 30 April. Under the pre-2023/24 basis year system, the end April date had the advantage of deferring tax because in any tax year, the calculation of tax was based on roughly 11 months of profit in the previous tax year. For example, in 2022/23, the taxable profit would be based on the trading period ending on 30 April 2022.

In 2023/24, the advantage of 30 April year end morphs into a disadvantage because tax will be based on:

1. Trading income to 30 April 2023, plus
2. Trading income from 1 May 2023 to 5 April 2024 (341/366ths of the trading year to 30 April 2024 as 2024 is a leap year), less
3. Any unused overlap relief available.

By default, the sum of 2 and 3 (the transitional profits) will be divided by five and spread over five tax years – 2023/24 to 2027/28.

Overlap relief

If the individual used an accounting date between 6 April and 30 March when they started their business, they may have paid tax twice on some of their profits and be entitled to overlap relief. So, in the above example, roughly the very first 11 months of profit would have been taxed twice. That could have been some considerable time ago.

Usually, businesses can only use overlap relief to get this tax back when they stop trading or when they change their accounting date. However, HMRC will allow any business that uses any accounting period and that has unused overlap relief to use it in the 6 April 2023 to 5 April 2024 transition year.

HMRC has now announced that, this summer, it is planning to launch an online form for submitting requests for details about overlap relief. This will provide an easier way to submit requests and make sure that these are dealt with separately from general post.

HMRC will also be publishing additional accompanying guidance on overlap relief and the changes to the rules for the new tax year basis.

Taxpayers with an accounting date other than 31 March or 5 April who are affected by the move to the new tax year basis may need to find out the details of their overlap relief. They’ll need to do this ahead of submitting returns for the 2023/24 transitional year.

Overlap relief information can only be provided if these figures are recorded in HMRC systems, taken from information submitted by taxpayers as part of previous tax returns. If this information has not been submitted in tax returns, HMRC will not be able to provide it.

When looking at a request for overlap relief information, HMRC needs some details about a business to be able to find the correct figures to report back to the taxpayer. If anyone wants to submit a request for information ahead of the launch of the online form, HMRC asks that they provide as much of the following information as possible:

• taxpayer name;
• National Insurance number or Unique Taxpayer Reference (UTR);
• either name or description of business, or both;
• whether this business is a sole trader or part of a partnership;
• if the business is part of a partnership, the partnership’s UTR;
• date of commencement of the self-employed business, or date of commencement as a partner in a partnership (if not known, then the tax year of commencement);
• the most recent period end date up to which the business used to report its profit or loss.

Ahead of more guidance being published on GOV.UK, information on overlap relief and basis period reform is provided in the Business Income Manual. Information is also available in a GOV.UK news article on basis period reform.

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