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1. Executive summary

HMRC commissioned Kantar Public to undertake qualitative research to understand why customers use a period of account not aligned with the tax year; their awareness and understanding of the current basis period rules; and their response to the proposed reform.

1.1 Background to research

When a person carries on a trade, there are specific rules which govern the period over which profits are measured for each tax year, and how profits are allocated to tax years. Self-employed customers are free to choose a period of account that suits their business and can choose a period of account that does not match the tax year, or not to draw up accounts at all.

The Government is reforming the rules for basis periods for the self-employed and business partners ahead of the introduction of Making Tax Digital for Income Tax . The aim of the reform is to simplify the taxation of trading profits, by removing the complex rules for overlap relief, reducing reporting obligations under Making Tax Digital and removing the tax distortions around choosing an accounting date.

HMRC propose to transition to the tax year basis in 2023 to 24, extending non-tax year basis periods to align with the tax year end, and making all outstanding overlap relief available. From 2024 to 25, tax would be calculated on the profits arising in the tax year (regardless of the accounting date), meaning that customers with non-tax year accounting dates would need to apportion profits into tax years, and in some cases use provisional figures. In addition, to mitigate any adverse cash flow impacts, HMRC proposes that customers can spread excess profits from 2023 to 24 over 5 years. As a result of the new rules and transition, businesses will no longer be taxed twice (overlap tax) and all existing overlap relief will be released ^{[footnote 1]}.

Kantar conducted a total of 45 in-depth interviews with 10 sole traders and 10 partnerships (ranging in annual turnover from less than 拢15,000 to over 拢65,000) who submitted their tax returns with a period of account not aligned with the tax year, and 25 tax agents who had submitted tax returns on behalf of their clients with a period of account not aligned with the tax year. All insights contained in the report reflect the views of the sole traders, partnerships and agents interviewed in August 2021. As a result, some results are likely to be from a relatively well-informed audience. Therefore, the findings in this report are neither representative nor generalisable to the wider population affected by this reform.

1.2 Insights

Drivers of a period of account not aligned with the tax year

Participants described both deliberate and subconscious reasons for having a period of account not aligned with the tax year. Sole traders, partnerships and agents who had deliberately chosen a period of account not aligned with the tax year, did so because it was believed to be beneficial to the business. Perceived benefits cited by agents and businesses included that it allowed businesses to complete tax returns when they were less busy, allowed the business more time to prepare for their tax returns, gave them a more accurate reflection of the tax owed, and aided cash flow. Sole traders and partnerships who had not made a conscious decision to have a period of account not aligned with the tax year had typically been set up based on when they first began trading, often with initial help from an agent.

Awareness and perceptions of existing basis period rules

Participants had different levels of awareness on the existing basis period rules. Sole traders and partnerships鈥� awareness and understanding was limited and did not extend beyond knowing that their period of account was not aligned with the tax year. Generally, sole traders and partnerships gained their limited understanding through the support of an agent when they started trading and then felt confident to follow the same process each year. Some sole traders and partnerships believed that it required them to pay attention to ensure they were using the correct period of account 鈥� particularly evident in those who had other sources of income that were aligned to the tax year. Participants considered it fair that businesses were allowed to choose a period of account that suited them, which was believed to be particularly useful for those in seasonal sectors, such as tourism.

In contrast, agents were aware of basis period rules and had a comprehensive understanding of how to use them, with knowledge often acquired during their training. Some agents felt they had to pay particular attention when applying the different rules in special circumstances, while other agents were confident to apply these and had experience of doing so. Regardless, participants were all confident in the tax submissions they had made, and none believed they had made errors on their returns due to having a period of account not aligned with the tax year.

Awareness and understanding of overlap relief ^{[footnote 2]} was higher among agents, while sole traders and partnerships had often not heard of the term, though few felt they had been taxed twice, despite this unfamiliarity. The few businesses that were aware of overlap relief spoke about recording the figure on their tax return each year, but there was some uncertainty around whether they were following the correct process. Overlap tax was the element of the rules that was considered unfair (even though most sole traders and businesses had previously been unaware of it and believed that they had not been taxed twice previously^{[footnote 3]}. The aspects considered unfair were that it could be difficult to claim back and the amount was not adjusted for inflation. A perceived benefit of overlap relief was that it could be a welcome additional tax deduction when the business ceased trading.

Awareness and understanding of the basis period reform

Awareness and understanding of the basis periods reform varied across participants. Sole traders and partnerships were previously unaware of the reform and received this information at the time of interview. On the other hand, agents were aware of the reform through information disseminated among their community (for example, newsletters from industry bodies)^{[footnote 4]}. Agents, however, lacked detailed knowledge on all the aspects of the reform and some had misconceptions; for example, some believed that HMRC will require all customers to have a 31st March or 5th April year end.

Sole traders and partnerships were open to the reform, as most felt that it would not affect them, and they were open to change. This included accepting that the reform may initially create more work for them or require them to seek further information to understand it. Sole traders and partnerships also felt that it would be simpler (both for themselves and for HMRC) if everyone worked to the same reporting period, and some felt it would make their calculations for tax returns more straightforward. In contrast, agents鈥� initial response to the reform was negative. Agents felt that it was the wrong time ^{[footnote 5]} to introduce change because of the challenges faced by businesses over the last 18 months. Agents also felt that because Making Tax Digital will be a significant change for small businesses, the reform would create more work and busier periods for agents; the type of work they offer would change; and that the reform may introduce cashflow issues for specific sectors.

When responding to the specific elements of the reform, participants were positive about stopping double taxation and releasing overlap relief, although agents were concerned about the likelihood of their clients being able to claim it back on transition due to poor record keeping. Participants felt that apportioning profits into tax years was achievable, although response to this element of the reform varied among participant groups. Agents were concerned about the additional workload this would create for them, especially at the start of the transition. Sole traders and partnerships, on the other hand, believed this would result in more work for them but that this was achievable, especially after they had completed it once.

Estimating profits for part of the tax year was a cause of concern as participants felt that, even though figures would be amended after the tax return, estimates would never be accurate due to self-employed incomes fluctuating year-to-year.

While businesses were less aware than agents of the elements of Making Tax Digital, across participant groups there was a shared belief that the reform to basis periods would not affect their ability to comply with Making Tax Digital, although some were concerned about the additional reporting required as part of Making Tax Digital.

To meet the requirements of the reform, participants believed they would align accounting dates to the tax year, especially if the accounting date had been set without much thought. However, some businesses and agents were reluctant to do this when income fluctuated seasonally. Some older customers^{[footnote 6]} (as well as older agents) spoke about the reform driving them to retire early, rather than make any change to their/their clients鈥� periods of account.

When implementing the reform, it was suggested that HMRC should provide additional information on the aspects of the reform, in good time, including the perceived benefits of the reform and how the reform will affect businesses. Agents desired more technical information, such as how to calculate and claim overlap relief.

2. Introduction

HMRC commissioned Kantar Public to undertake qualitative research to understand why customers use a period of account not aligned with the tax year; their awareness and understanding of the current basis period rules; and their response to the proposed reform.

2.1 Background

When a person carries on a trade, there are specific rules which govern the calculation of profits and when tax is due. Self-employed customers are free to choose a period of account that suits their business. The basis period rules ensure that tax is calculated for all tax years in which the business trades, and also makes sure that there are no profits which fall between years and fail to be taxed. So, if a sole trader/partnership chooses a period of account that matches the tax year, HMRC basis period rules will be straightforward; if a period of account does not match the tax year, then more complex basis period rules will apply, particularly in the early years of trade. HMRC estimates that 7% of sole traders and 32% of partnerships do not have basis periods aligned with the tax year.

In order to cover a wide range of circumstances, the rules can be complex. For some businesses, the rules may result in part of their profits being taxed twice. These 鈥渙verlap鈥� profits are usually given tax relief when the business ceases or changes their period of account.

The Government is reforming the basis period rules for the self-employed. This reform aims to simplify rules and remove complexity when sole traders start up in business or change their accounting dates.

HMRC commissioned this research to provide insights on customer and agent experience of completing tax returns with basis periods not aligned with the tax year and to gauge their views towards basis periods reform.

2.2 Research aims

The research aimed to:

• build a picture of the understanding and experiences of sole traders, partnerships and agents who submit tax returns with a basis period not aligned with the tax year
• understand why basis periods not aligned with the tax year are being used
• identify any challenges to using the existing rules
• capture awareness and understanding of the basis period reform and response to the changes
• identify suggestions for HMRC.

2.3 Method

A qualitative approach was used to gain in-depth customer insight. Findings are based on 45 interviews completed via telephone or Zoom with agents (n25), sole traders (n10) and partnerships (n10) who have submitted a tax return with a period of account not aligned with the tax year in 2019 to 2020. Interviews were completed between 2nd and 17th August 2021.

Kantar recruited the participants through the sample provided by HMRC, which included details of customers that had a period of account not aligned with the tax year, and the details of the agents for these customers (where relevant). Opt-out letters^{[footnote 7]} were sent to:1,067 agents^{[footnote 8]} of sole traders/partnerships with a basis period not aligned with the tax year, 255 partnerships and 622 sole traders with a basis period not aligned with the tax year and who submit their own Income Tax Self-Assessment returns. An 拢80 incentive was offered to participants.

The 25 agents included a mix of independent tax agents, small firms (with under 50 clients) and two larger firms (ranging from 500 to 2,500 clients). The agents included those with and without professional qualifications.

The 10 sole traders and 10 partnerships sample included a mix of business sizes. Occupations of the sole traders were mixed, including drivers, tutors, and health care professionals. Sectors that partnerships worked in included management consultancy, finance, film, and music. All the sole traders and partnerships submitted their own tax returns.

Please note, the findings are qualitative in nature, seeking to explore the views and experiences of participants. The data does not aim or allow for statistical analyses. The data presented in this report is neither representative nor generalisable and is not meant to be used to provide statistically significant results. Where relevant, insights are attributed to the customer group (agents or sole traders and partnerships).

3. Findings

3.1 Participant confidence in dealing with tax

All agents described themselves as confident in dealing with tax. Sole traders and partnerships, however, had varying levels of confidence in dealing with tax. Sole traders and partnerships described being reliant on agents at the start of trading to explain the process of submitting a tax return. While some felt confident to follow the processes set up for them, others still described themselves as not confident.

3.2 Awareness and understanding of basis period rules

This section explores the extent and nature of participants鈥� awareness and understanding of basis period rules. It examines in particular their awareness and understanding of overlap relief.

Sole traders and partnerships鈥� awareness and understanding of basis period rules was limited, and generally did not extend beyond knowing that their period of account was not aligned to the tax year and understanding how to complete a tax return to their period of account. They were generally not aware of the different rules that apply in special circumstances, such as in the first few years of trading or when ceasing trading. Moreover, they did not typically think of basis period 鈥榬ules鈥� and may not even have heard of the term 鈥榖asis period鈥� before. They had generally gained their limited understanding when they started trading, often through support from an agent, and had not read up on basis period rules or researched the subject beyond knowing how to keep records and prepare a tax return to their period of account.

In contrast, agents were aware of basis period rules and had a comprehensive understanding of how to use them. They had typically studied basis period rules during their training. However, some agents felt they had to pay particular attention when using the different rules that applied in special circumstances. Agents鈥� confidence in understanding how to apply these different rules was linked to their experience of doing so. Those that had little or no experience, for example of claiming overlap relief for a client, expected that they would need to read guidance and legislation to work out how to follow the processes required.

Awareness and understanding of overlap relief was also higher among agents than sole traders and partnerships. The latter generally did not believe that they had ever been taxed twice or were due relief as a result, and awareness of the term 鈥榦verlap relief鈥� was low^{[footnote 9]}. Those businesses that were aware of overlap relief typically recorded the relevant figure on their tax return each year. However, among these sole traders and partnerships, there was some uncertainty around whether they were following the correct procedure for recording overlap relief.

Agents鈥� knowledge and understanding of overlap relief was higher among those with greater experience of recording and claiming overlap relief for their clients. For example, those who had claimed it knew the process they needed to follow and how to complete the tax return to claim overlap relief.

Agents with less experience of claiming overlap relief for their clients felt they would have to check guidance to work out how to do so.

聽3.3 Views on current basis period rules

This section looks at participants鈥� views on the current basis period rules and includes a specific focus on overlap relief.

Sole traders and partnerships often had guidance from an agent at the beginning, that is, once their business was set up with a particular period of account. They then learnt how to work to that basis period and, subsequently, followed the same process each year. Participants felt that this process therefore became familiar and straight forward over time. However, none of the sole traders and partnerships in the sample had experienced any of the special circumstances in which different rules applied.

Some sole traders and partnerships noted that it required extra focus to ensure they were using the correct period of account, particularly as it was different to the tax year period for which they completed their Self Assessment. Those who had other sources of income that was aligned to the tax year, such as from employment or other businesses, noted that they needed to take care to ensure they were using the correct period of account for the business which had a basis period not aligned to the tax year. However, beyond remembering which dates to use, it was not considered difficult.

Agents considered the current basis period rules as easy to use, even though the different rules in special circumstances required some extra attention. They felt confident that by reading guidance and legislation on the different rules, they could successfully work out how to follow them.

The only aspect of basis rules considered unfair was the double taxation that occurs in the first years of trading, even though most sole traders and partnerships had previously been unaware of overlap tax. Participants believed it was beneficial that businesses were allowed to choose a period of account that best suits them. This was considered particularly useful for businesses in seasonal sectors, such as tourism. In addition, agents perceived it to be fair that basis period rules helped them to spread their workload more evenly over the year. However, double taxation was considered (including by sole traders and partnerships that only learnt about it during the interview) to be a negative aspect of basis period rules. This was because it could not be claimed back for a long time, perhaps decades for a long-standing business, and the amount was not adjusted for inflation, so that it was worth less when it was paid out by HMRC than it was when the business paid the tax.

One perceived benefit of overlap relief was that it could be a welcome tax deduction when a business ceased trading due to a sole trader retiring, when profits were likely to diminish.

Overall, agents interviewed considered the process of recording and claiming overlap relief to be straightforward. Where it was recorded, overlap relief was entered on tax returns each year to carry it forward. Agents had found the process of claiming overlap relief to be straightforward if they knew the business鈥� overlap relief figure. If this amount was not available from the client or the client鈥檚 previous agent, agents found it difficult to obtain this figure from HMRC, as they believed that HMRC did not keep records of business鈥� overlap relief carried over, and held the belief that HMRC relied on businesses or their agents to record it. This had led some agents to estimate the overlap relief figure for their clients based on records of profits in the first years of trading.

3.4 Drivers of the decision to use a basis period that is not aligned with the tax year

This section examines the reasons why businesses used a basis period that is not aligned with the tax year, and agents鈥� perceptions of the benefits of their clients using them.

While some sole traders and partnerships had deliberately chosen a particular basis period because they saw it as beneficial, others had not made a conscious decision to have a period of account that was different to the tax year.

Sole traders and partnerships for whom a basis period was a conscious decision perceived there to be particular benefits to the business. These included having a year end just after a busy time of year. This gave businesses more time to do the bulk of their bookkeeping and accounting activities during a quieter period. Further, there was a view that ending an accounting year just after a busy period meant it gave a more accurate reflection of business over the year than accounting to the tax year would.

This included not only businesses that are typically seen as seasonal, such as those in the tourist industry, but also businesses in the retail and entertainment sectors which had a busy period in the run up to Christmas.

In addition, some sole traders and partnerships explained that they had a personal preference for working to the calendar year, as it seemed a more familiar and logical cycle of 12 months than the tax year. Other sole traders and partnerships had other businesses that had a particular basis period, so they preferred to align all their businesses to the same basis period for simplicity and ease. There were also sole traders and partnerships that had been advised by an agent to set up a basis period that did not align with the tax year, for reasons discussed below.

Sole traders and partnerships that had not deliberately chosen a period of account that did not align with the tax year had typically started their accounting period when they first began trading, often with help from an agent at the time. This had set a pattern that they followed each year and saw no benefit of changing.

Agents perceived that a basis period could benefit certain clients in particular circumstances. Echoing the views of some sole traders and partnerships, agents thought that businesses that experienced seasonal fluctuations in income and activity benefitted from choosing to prepare their accounts and pay their tax when it was not a busy period for them. This gave them more time to focus on the task and to aid cash flow as they have a longer period to pay tax. In addition, an agent might suggest that a client chose a basis period not aligned with the tax year in order to provide 鈥榤aximum lag鈥� that is, a longer period between the accounting year and when tax is due to be paid to HMRC. This was also seen as aiding cash flow and additionally, gave the business and their agent more time for tax planning.

Further, once a business had a basis period not aligned with the tax year, an agent generally did not see it as advantageous to change the period of account to align with the tax year. They expected that this would only create an administrative burden which would be difficult to justify to their client, and there was also a risk that the change could incur a higher tax bill for the client in the changeover period.

Nevertheless, for new clients that an agent did not think would benefit from using a basis period for any of the above reasons, an agent would typically advise them to align their period of account with the tax year during the first years of trade. They saw this as a simpler and easier for their clients to understand their accounts and tax, and more likely to align with other taxes and financial processes, such as Self Assessment, and, for example, CIS reimbursement.

There was a view among some agents that non-tax year accounting dates were more likely to be used by older businesses as a legacy from years ago when they first started trading. As a result, agents expected that basis period rules would apply to fewer businesses in the future as older businesses ceased trading over the coming years.

3.5 Submitting a tax return not aligned with of the tax year

This section explores the experiences of participants when preparing and submitting a tax return not aligned with the tax year, including how easy or difficult they found it to be, and their confidence in the accuracy of their returns.

Overall, participants were confident in the accuracy of their tax return submissions when using a basis period not aligned with the tax year; no participant believed they had made any errors on their submissions because of their basis period. Sole traders and partnerships used formulas or processes that had been set up when trading commenced, often as advised by an agent used at the time. They were confident in the process that they followed and did not believe they had made any errors in their tax returns, even if it sometimes required extra concentration to double-check that they were using the correct period of account in their calculations. Some sole traders and partnerships conceded that this extra attention might result in their tax return taking slightly longer to prepare.

Furthermore, where an individual had to calculate other sources of income or taxes, such as income from employment, Self Assessment or CJRS, all of which were aligned to the tax year, having a business with a basis period not aligned with the tax year could add extra complication.

Agents were also confident in the accuracy of their calculations and submissions for clients affected by basis periods not aligned with the tax year. Preparing a tax return for a period of account not aligned with the tax year was considered no more complicated or difficult than one that was aligned with the tax year. In fact, a basis period that gave a particularly long time lag before the return was due, was believed to allow agents more time to prepare the return as their clients had more time to gather the necessary information.

The key area of complexity for agents working with basis periods not aligned with the tax year was when the special circumstances applied; for example, in the first few years of trading or when a business ceased trading. However, as discussed, agents nevertheless felt confident that they could work out how to follow the correct processes in these circumstances. None of the participating sole traders or partnerships interviewed were affected by special circumstances.

Despite their confidence in their own practice, there was a view among agents that their clients and other agents were likely to find submissions confusing when the period of account was not aligned with the tax year.

聽3.6 Understanding of and views on the basis period reform

This section explores participants鈥� understanding of the basis period reform and their response to the elements of the reform.

Basis period reform

The Government is reforming the rules for basis periods for the self-employed and business partners ahead of the introduction of Making Tax Digital for Income Tax 聽The aim of the reform is to simplify the taxation of trading profits, by removing the complex rules for overlap relief, reducing reporting obligations under Making Tax Digital and removing the tax distortions around choosing an accounting date.

HMRC propose to transition to the tax year basis in 2023 to 24, extending non-tax year basis periods to align with the tax year end, and making all outstanding overlap relief available. From 2024 to 25, tax would be calculated on the profits arising in the tax year (regardless of the accounting date), meaning that customers with non-tax year accounting dates would need to apportion profits into tax years, and in some cases use provisional figures. In addition, to mitigate any adverse cash flow impacts, HMRC proposes that customers can spread excess profits from 2023 to 2024 over five years.聽 As a result of the new rules and transition, businesses will no longer be taxed twice (overlap tax) and all existing overlap relief will be released.

The overall aims of the reform are to remove the complex rules for overlap relief, reduce reporting obligations under Making Tax Digital, and remove the tax distortions around choosing a basis period. 聽

Participants鈥� initial response to the reform

Awareness and understanding of the basis period reform varied across participants. Sole traders and partnerships were previously unaware of the reform. Most sole traders and partnerships had, however, heard about the introduction of Making Tax Digital but they did not have detailed knowledge of it. On the other hand, agents were aware of the reform through information disseminated among their community (for example, newsletters from industry bodies) ^{[footnote 10]}. Agents, however, did not have detailed knowledge on all aspects of the reform and some had misconceptions; for example, some believed that HMRC will require all customers to have a 31st March or 5th April year end.

Sole traders and partnerships were open to the reform, as most felt that it would not affect them, and they were open to change. This was especially true for those whose basis period had been set without much thought or by their previous tax agent, while those whose basis period had been set intentionally were more sceptical. This included accepting that the reform may initially create more work for them or require them to seek further information to understand it. Sole traders and partnerships also felt that it would be simpler (both for themselves and for HMRC) if everyone worked to the same reporting period, and some felt it would make their calculations for tax returns more straightforward.

In contrast, agents鈥� initial response to the reform was negative. Agents felt it was the wrong time to introduce change^{[footnote 11]}, that the reform would create more work and busier periods for them, that the type of work they offer would change, and that the reform may introduce cashflow issues for specific sectors. This negativity led agents to be doubtful about who would benefit from the reform, with some believing that HMRC were doing 鈥渕ore than necessary鈥� and not considering the needs of customers. There was concern among a few agents at the time of interview that HMRC would go ahead with the reform regardless of the outcomes of the consultation.

Agents鈥� belief that it was not the right time to introduce the reform emerged from the perception that the introduction of Making Tax Digital will be a big change for some businesses and an additional reform in line with that would over-complicate things. Agents were also concerned about the numerous challenges faced by small businesses over the last 18 months due to the pandemic and whether change would put further pressure on them. Further to this, agents felt that introducing the reform within two years was too soon for change (since this research and consultation have been undertaken HMRC have delayed the roll out of the reform, to respond to concerns raised). Some agents could see the logic of introducing the reform alongside Making Tax Digital, but still felt it was 鈥渢oo much too soon鈥�.

Agents were also concerned about the additional work they would need to undertake to meet the requirements of the reform, as well as the 鈥榖ottlenecks鈥� of busy periods created by reporting to the tax year.

Agents believed this additional work would result in more expense for the client. However, some agents believed they would not be able to pass the additional cost on to their client and, if they did, it could encourage clients to complete their own returns (which they believed would result in errors).

Some agents were concerned that the type of work they offer would change. For example, there was a concern that the process of tax returns would become more complicated if they needed to take numerous sets of accounts to work out a return. Others were concerned that they would need to help clients with record-keeping, changing the type of service they provide.

Agents whose clients were reliant on seasonal incomes believed that the reform may introduce cashflow issues for these clients. They were particularly worried about the farming and tourism industries, who they believed are reliant on seasonal incomes, so their income fluctuates and, therefore, does not fit the tax year calendar.

Participants鈥� response to elements of the reform

This section explores participants鈥� response to the various elements of the reform, including:

• HMRC propose to move the tax year basis in 2022 to 23^{[footnote 12]}, stopping double taxation and releasing all existing overlap relief
• HMRC would spread the transitional excess profits over up to five years
• from 2023 to 24^{[footnote 13]}, tax would be calculated on the profits arising in the tax year (regardless of the accounting date of customers)
• customers would need to apportion profits into tax years
• customers may need to estimate profits for part of the tax year

Transitioning the tax year basis in 2022 to 23 and spreading the excess profits

Reflecting their initial response to the reform, agents felt that transitioning the tax year basis in 2022 to 23 did not provide enough time for transition and was not the right time for small businesses. Agents were mainly concerned about the impact the COVID-19 pandemic had on small businesses and rolling out changes at the same time as Making Tax Digital.

Agents, sole traders and partnerships believed that spreading excess profits would ease the transition (with sole traders and partnerships understanding that this would prevent them from having a large tax bill in one go). However, participants suggested that they should be able to choose how many years they spread the profits over, especially among the sole traders and partnerships who were near retirement.

Concerns raised by agents included whether there will be an impact if the tax rate changes during transition and whether clients will be temporarily moved into higher tax bands. While agents recognised how this element was designed to mitigate the impacts of the reform, they were still concerned about the impact the reform would have on clients reliant on seasonal incomes.

Stopping double taxation and releasing overlap relief

Participants were positive about stopping double taxation and releasing overlap relief as they felt that it would be good if new businesses were not taxed at the start of trading (although most sole traders and partnerships had previously been unaware of this double taxation). 聽

However, agents considered the benefits to be minimal as they believed that their clients were often not taxed twice during the first few years of trading as they made little money during this period and were concerned about the likelihood of their clients being able to claim the relief back due to a lack of recordkeeping. There was also uncertainty among participants about whether the relief would be awarded as a tax rebate and whether it would be released immediately as some businesses had planned to save the overlap relief until they retire.

Apportioning profits into tax years

Overall, participants felt that apportioning profits into tax years was achievable, though response to this element of the reform varied among participant groups. Agents were concerned about the additional workload this would create for them, especially at the start of the transition. Sole traders and partnerships, on the other hand, believed this would result in more work for them but that this was achievable, especially after they had completed it once.

Using provisional figures for part of the tax year

Across participants, estimating profits for part of the tax year was a cause of concern.聽 Participants felt that estimates would never be accurate due to self-employed incomes fluctuating year-to-year. Some sole traders discussed using previous accounts to try to produce accurate estimates, while agents were concerned about the amendments they would have to make to rectify the estimates.

Agents believed that this element of the reform would result in more errors (either through non-compliance or accident).

Agents, and participants whose basis period had been set intentionally, were concerned about the impact this would have on particular sectors, such as farming, whose profits vary year-to-year.

The impact the basis period reform will have on the requirements of Making Tax Digital

Researchers explained to participants that Making Tax Digital will require self-employed individuals to keep digital records and submit quarterly summaries of income and expenditure to HMRC using software.

While agents had greater awareness of the details of Making Tax Digital than sole traders and partnerships, across participant groups there was a shared belief that the reform to basis periods would not affect their ability to comply with the aspects of Making Tax Digital, though sole traders had little understanding of how the reform to Basis Periods could affect Making Tax Digital. Impact of the basis period reform

This section explores the perceived impacts of the reform, and any actions participants expected to take because of the reform.

聽Aligning periods of accounts to the tax year

To mitigate the impact of the reform, sole traders, partnerships, and agents said they would change periods of accounts to align with the tax year, where possible, as they believed this would make reporting simpler.

Sole traders and partnerships felt they would need help to change their period of account, while agents felt confident they could help their clients do this. One sole trader was worried about the additional cost this support would entail.

However, not all sole traders and partnerships were open to change. Some mistakenly believed they would need to change their period of account and were concerned about the additional work they would need to do undertake to do so. Others were said they would not align their period of account to a time when they are busier.

Sole traders and partnerships plan to upskill themselves

Reflecting their openness to change, sole traders and partnerships spoke about the additional research they would do to upskill themselves to enable them to meet the requirements of the basis period reform and Making Tax Digital.

Other impacts of the reform

Some participants were concerned that the reform would have a negative impact on the economy. Agents, sole traders and partnerships believed that this may encourage them, their peers, and/or their clients to retire early. The sole traders and partnerships that were not open to change were often older customers and discussed how they would stop working, rather than make any necessary change to their period of account or upskill themselves

鈥淭he transition would be an extra hassle that puts me off continuing trading鈥� (Partnership, artist)

Agents believed that the number of reforms happening to the tax system would encourage their peers or clients to stop working. This was especially true for older customers or agents.

Others were concerned that the reform would change the economic cycle, for example when farmers are able to buy their equipment.

3.7 Participants鈥� suggestions for HMRC

This section explores participants鈥� suggestions for HMRC regarding the basis period reform.

Information participants would like and how they would like to receive it

When asked for their suggestions for HMRC, participants spoke about the additional information they would like to receive on the basis periods reform. Sole traders and partnerships wanted to know how the reform would affect them, what they need to do to adapt to changes and guidance on how to adapt to changes.

Agents desired more technical information, for example on how to claim the overlap relief and how to find out the amount of overlap tax. Agents felt that it was their duty to explain the changes to their client and wanted HMRC to 鈥渁ppreciate鈥� agents鈥� responsibility by communicating the changes to them in the first instance. 聽

Across participants there was a desire to have this information as soon as possible, to allow them to be prepared for any changes that occur.

In addition, there were suggestions that HMRC should be patient during the transition period and that they should share the perceived benefits of the reform.

In terms of how they would like to receive the information, participants suggested running workshops or webinars or creating a dedicated page on the reform. Agents suggested setting up a dedicated helpline for the reform, or reinstating the agents鈥� helpline, so that the call handlers had a suitable level of technical knowledge 聽

As participants were also uncertain about some elements of the reform, Kantar suggest that HMRC provides clarity around particular issues; for example, that customers will not be required to change their accounting date, and more information on the records that HMRC holds on overlap tax.