Proposed changes to basis periods for Income Tax

From April 2023, Making Tax Digital (“MTD”) for Income Tax is scheduled to be introduced and should apply to, amongst others, individuals subject to Income Tax on the profits of their trade, profession and vocation or property business where total gross income exceeds £10,000.

In advance of MTD for Income Tax, HM Revenue & Customs ("HMRC") launched a consultation on 20 July 2021 - scheduled to close on 31 August 2021 - on proposed changes to basis periods for Income Tax.  

These changes could have a significant impact on asset managers and individual Fund Executives where:

• The asset manager is structured as a partnership, normally in an asset manager context as a United Kingdom established Limited Liability Partnership (“the Partnership”); and 
• The individual Fund Executives are partners - or members - of the Partnership (“the Partners”).

Under current rules (known as the ‘current year basis’ rules), the Partners are liable to Income Tax and, if applicable, National Insurance Contributions (“NIC”) on the Partnership’s profits, adjusted for tax, in the accounting period ending in the tax year – for example, where the Partnership has an accounting period ended 31 December, the Partners would be subject to Income Tax and, if applicable, NIC on the Partnership’s tax adjusted profits for the accounting period ended 31 December 2020 in tax year 06 April 2020 to 05 April 2021.   

Under the proposed changes, the ‘current year basis’ will be replaced with a new ‘tax year basis’ from tax year 2023/24 with the Partners liable to Income Tax and, if applicable, NIC on the Partnership’s tax adjusted profits in the tax year – for example, where the Partnership has an accounting period ended 31 December, the Partners would be subject to Income Tax and, if applicable, NIC in tax year 06 April 2025 to 05 April 2026 based on an apportionment of the Partnership’s profits, adjusted for tax, in the accounting periods ended 31 December 2025 and 31 December 2026.  

In addition, there are proposals for transitional rules in tax year 06 April 2022 to 05 April 2023 where the basis period would be the current year basis period plus a transition element, starting on the following day and ending on 5 April 2023 with relief for any overlap profits either brought forward (or generated).

These proposed changes could have a significant impact on asset managers’ working capital and individual Fund Executives’ cash flow with individual Fund Executives’ facing potential increased Personal Tax liabilities in tax year 06 April 2022 to 05 April. 

HMRC Family Investment Company ("FIC") team 

FICs - typically, structured as a UK incorporated and tax resident private limited company with an individual and their family members as shareholders - are increasingly being used by individual Fund Executives to hold co-investment and carried interest entitlements in investment funds.

In April 2019, a specialist unit was set up by HMRC to consider the tax avoidance risks associated with FICs.

HMRC have recently closed this specialist unit having found “no evidence” of a correlation between those who set up FICs and tax avoidance. 

If you would like to discuss FICs or general personal tax planning, we would be delighted to arrange a call or meeting with you to discuss further.

Second self-assessment payment on account reminder for 31 July 2021

We wanted to provide a reminder that the second self-assessment payment on account for tax year 2020/21 was due by 31 July 2021. Late payment fees and interest may be imposed where payments were not made on time.  

If not done so already, taxpayers can make payment by debit card or phone/internet banking or cheque.