ICAS responds to HMRC and HM Treasury’s Budget day consultations
By Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes)
3 July 2023
We outline ICAS’ response to three tax consultations that were announced on Budget day.
Budget day tax consultations
The Chancellor presented his spring Budget on 15 March 2023. On the same day, HMRC announced tax consultations on expanding the cash basis for the self-employed and simplifying and modernising its income tax services through the tax administration framework, and HM Treasury announced a consultation on the taxation of environmental land management and ecosystem service markets.
Following consultation with our members and other interested stakeholders, ICAS responded to all three tax consultations. The responses are available to read on the tax consultations and submissions section of our website.
Expanding the cash basis for the self-employed
In this consultation, HMRC was looking for opinions on proposed reforms to the cash basis for the self-employed. Originally conceived by the Office of Tax Simplification in its 2012 report, the eventual approach taken is slightly different, making cash basis accounting an option for unincorporated businesses with a turnover of £150,000 or below (£300,000 or below if the taxpayer is claiming universal credit).
While only being taxed on income as it is actually received is of particular advantage to the smallest businesses, we feel that larger businesses are more likely to have complicated affairs where accruals accounting would be more appropriate. Larger businesses may also need to prepare accruals accounting for other purposes.
The consultation considered the alignment of the entry and exit thresholds for the cash basis with those implemented for the VAT cash accounting scheme (currently an entry threshold of £1.35 million and exit threshold of £1.6 million), or possibly removing the limit altogether. It also considered relaxing the loss relief rules and enabling a higher level of finance costs than the £500 per tax year allowed currently.
Overall, we believe that there should be improvements to the design of the cash basis, so that more businesses are able to understand why it may be the best option for them and can benefit from it. By reforming the interest and loss restriction rules so that they are more consistent with those used for accruals accounting, we feel HMRC would encourage more taxpayers to secure the benefit of cash basis when they may not be currently.
We also think that a set turnover threshold is probably unnecessary. By removing this, HMRC can help ensure that unincorporated businesses are able to decide what is best for their particular circumstances. Improved education and HMRC guidance are instead needed to help businesses understand and appreciate the difference between the systems and decide on the best method for their situation.
Review our response in more detail
Simplifying and modernising income tax services through the tax administration framework
In this consultation, HMRC explored how it could move to a digital first approach as a means of simplifying the tax system.
In line with our tax policy positions, we are strongly supportive of the principle of tax simplification and recognise the role that digital services can play in facilitating this. We appreciate the importance of developing a system of tax administration which is easy to use at the point of contact between taxpayer and taxing authority, allowing all taxpayers (including the digitally challenged) to have effective and efficient access to the tax system.
However, we don’t support mandatory digital tax services for everyone. Our members are generally willing to use HMRC’s digital services, indeed this would be preferable to spending hours waiting in queues for telephone helplines, but we believe that digital facilities should be accessible to all on the terms that they want.
It’s our view that HMRC should focus on improving its existing digital systems as a means of encouraging the uptake of it’s digital services, so that they are efficient enough that everyone is able to use them. There also needs to be appropriate recognition of the role of agents, whom we would argue should be enabled to carry out more actions for their clients in all matters relating to HMRC.
Review our response in more detail
Taxation of environmental land management and ecosystem service markets
This consultation from HM Treasury explored possible changes to the tax system as part of recognising the importance of initiatives which help the UK work towards achieving net zero.
We fully support any proposal to extend agricultural property relief for inheritance tax so that land being used for environmental land management and ecosystem service markets would still qualify, because it’s important that there is not a tax disincentive for businesses to participate in such initiatives. We do however feel that there is merit in exploring extending this to business property relief for inheritance tax, as where a landowner is farming the land themselves there could be an inheritance tax disadvantage if the value of their land is in excess of agricultural value.
Following feedback from our members, we believe that taxpayers and agents need clearer HMRC guidance to ensure that they are aware of the correct treatment for income generated by ecosystem service markets. Our members and fellow tax professionals seek clarity so that they can ensure transactions can be correctly treated in their clients’ tax returns.
We note the various English environmental land management initiatives mentioned in the consultation. As a professional body with members based throughout the UK, we feel that it’s important that any similar schemes that operate in Scotland, Wales, or Northern Ireland are given equivalent treatment for UK wide taxes. The importance of effective environmental land management applies equally throughout the UK.
In any proposal to change the inheritance tax reliefs, we also feel it’s important to bear in mind the differences between the Scottish legal position on leases, as well as any differences in other parts of the UK. Taxpayers should be treated fairly and consistently, regardless of where in the UK they reside and where the land that they own and/or farm is located.
Review our response in more detail
Let us know your views
We welcome members’ input to inform our work on consultations or other tax-related matters – email us to share your insights and feedback. ICAS responds to many tax calls for evidence and consultations, as well as producing tax policy papers and reports. We also regularly attend meetings with HMRC at which service levels, delays and other issues are discussed, and we raise problems being encountered by members.
