IR30 29 November 1994 SELF ASSESSMENT: TRANSITION TO CURRENT YEAR BASIS ANTI-AVOIDANCE PROVISIONS The Chancellor proposes in his Budget to introduce measures in the 1995 Finance Bill to prevent the exploitation of the rules for the transition from the preceding year basis to the current year basis of income tax. The Government's intention to introduce these rules was announced in an Inland Revenue Press Release of 31 March 1994. Following further consultation, the Government intends to make some important changes to the proposals to target them more effectively. The changes would apply to the main benefit rules, the counteraction provisions and the time in which the Inland Revenue could start enquiries. The Inland Revenue have today published the draft legislation to be introduced in the Finance Bill. The Chancellor's intention in publishing this draft is to give as long a period as possible for consultation before the legislation is considered by Parliament. DETAILS 1. The 1994 Finance Act introduced the main legislation governing self assessment. Self assessment is a major reform and an important step towards simplification of the tax system. 2. As part of the simplification the old preceding year basis of assessment for taxing the self-employed and some other income was replaced by the current year basis. The current year basis applies from commencement to businesses and other sources of income starting after 5 April 1994. 3. Special rules were introduced to govern the transition from the preceding year to the current year basis for those businesses that began before 6 April 1994. Broadly for the year 1996/97 they allow a catching up process by averaging the profits for the two years ending in that year. Income in that period is therefore effectively taxed (in most cases) at half of the normal marginal rate for that year. And the business profits arising in the period from the latest accounting date in 1996/97 to 5 April 1997 ultimately drop out of account altogether. 4. The purpose of the transitional rules is to ensure that there is no double taxation of business profits and other income, presently taxed on the preceding year basis under Schedule D, which the change to the current year basis of assessment might otherwise cause. The rules work in a way that provides certainty that the profits or income arising in a particular period will be taxed at a reduced rate (and in some cases will drop out of account altogether). It is therefore necessary to counteract the effect of artificially moving profits or income into these periods. 5. The Government announced on 31 March 1994 its intention to introduce this legislation in the 1995 Finance Bill. The proposals have been modified following consultation, and full details are given in the commentary with the draft legislation published today. In summary the changes are:- the legislation would not apply unless the main benefit to be expected from the change or transaction identified as falling within the rules is a tax advantage arising from the operation of the transitional provisions; the counteraction in cases where the provisions apply would not be affected directly by the accounting date of the business; a proportionate test would be applied; the deterrent element in the counteraction would be reduced by a factor of four from that originally proposed; and the time during which the Inland Revenue could initiate enquiries under these proposals would be reduced (normally) to two years from the time the relevant return and self assessment is sent to the Inland Revenue, except in cases of fraudulent or negligent conduct, or where there is incomplete disclosure. 6. A copy of the draft legislation to give effect to the proposals may be obtained (post free) or be collected from the Public Enquiry Room, West Wing, Somerset House. 7 Comments are invited on the draft legislation by 10 January 1995. They should be sent to: Damian Riordan Business Profits Division Inland Revenue Room 431 22 Kingsway London WC2B 6NR NOTES FOR EDITORS 1. The introduction of self assessment and simplification of personal tax was announced by the Chancellor in the 1993 Budget. The main legislation to give effect to it is contained in the 1994 Finance Act. 2. A key element of the proposals to make the tax system for the self-employed and those in receipt of investment income both simpler and fairer is the introduction of the current year basis of assessment for all types of income. To permit the move from the preceding year basis to the current year basis, without doubly taxing businesses and income, it is necessary to tax profits and income arising in the transitional period at an average rate reflecting the length of the transitional period. 3. The Government's intention to legislate to prevent exploitation of these rules was announced, following consultation, in the Press Release of 31 March 1994.