Proposed changes to the basis period rules, which are currently being consulted on, could result in some self-employed businesses being mandated into Making Tax Digital for Income Tax sooner than expected.

Making Tax Digital for Income Tax

Based on the current draft regulations, Making Tax Digital for Income Tax Self Assessment (MTD ITSA) will compulsorily apply for accounting periods starting on or after 6 April 2023.

  • An existing trader or Property business owner with a 5 April year-end, would join MTD ITSA on 6 April 2023, this being the first accounting period starting on or after 6 April 2023.
  • An existing trader with a 31 March year-end would join MTD ITSA on 1 April 2024, this being the first accounting period starting on or after 6 April 2023. 

Consultation: basis period reform

HMRC recently published a Consultation, policy paper and draft legislation proposing a simplification of the Income Tax rules for the self-employed by allocating trading profit to tax years regardless of the business’ accounting period end date.

  • This will apply from 2023-24.
  • There will be a transition period in 2022-23.
  • Accounting periods that end between 31 March and 4 April inclusive will be treated as ending on 5 April.
  • In the 2022-23 transition year, business profits will be reported from the end of the previous period assessed in 2021-22 up to 5 April 2023. 
    • Businesses with a 31 March 2023 accounting date will report business profits up to that date. This will be deemed to be 5 April 2023.
    • The subsequent accounting period will be deemed to start on 6 April 2023.

Impact on MTD ITSA

If the Basis period reforms being consulted on go ahead, existing traders with a 31 March accounting period end could be mandated into MTD ITSA a year earlier than they may have expected. MTD ITSA would apply from 6 April 2023, rather than 1 April 2024.

For a trader with a 31 March year-end:

  • Profits for 1 April 2022 to 31 March 2023 will be reported in 2022-23.
  • Profits for 1 April 2023 to 31 March 2024 will be reported in 2023-24.
    • This is deemed to be 6 April 2023 to 5 April 2024 for tax purposes.
    • Being the first accounting period starting on or after 6 April 2023, MTD ITSA will apply from the quarter beginning 6 April 2023.

This impact is not limited to traders with an accounting period ending on 31 March. Under the draft regulations, traders would have expected to join MTD ITSA at different dates depending on their accounting end date, for example:

  • Accounting date 30 June: MTD ITSA starts from 1 July 2023. 
  • Accounting date 30 September: MTD ITSA starts from 1 October 2023. 
  • Accounting date 31 December: MTD ITSA starts from 1 January 2024.

In all cases, under the basis period reform, as currently proposed, the MTD ITSA start date is likely to become 6 April 2023.

Useful guides on this topic

Consultation: Income Tax Basis Period reform
HMRC have published a new consultation ‘Basis period reform’ alongside a policy paper and draft legislation that propose a simplification of the Income Tax rules for the self-employed by allocating trading profit to tax years regardless of the business’ accounting period end date.

Accounting periods and tax basis periods
Which date do I choose? Does it matter? Can I change my accounting date?

MTD: Toolkit for accountants
What is the current timetable for Making Tax Digital (MTD)? How will it work? Which clients will be excluded? What planning needs to be undertaken?  

Making Tax Digital: Index & timeline
When does Making Tax Digital (MTD) apply? What does Making Tax Digital really mean? How will it affect you? Does MTD mean quarterly reporting? Is my business exempted from Making Tax Digital?

Making Tax Digital: Survival guide (for the self-employed & landlords)
This is a freeview 'at a glance' guide for the many self-employed taxpayers, company owners and property landlords who are unaware of HM Revenue and Custom's radical plans to transform the tax online filing system. 

External links

Policy paper: Income tax basis period reform 

Consultation: Basis period reform 


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