It was announced in June that The Office of Tax Simplification (OTS) is reviewing the benefits, costs and wider implications of a change to the date of the end of the UK tax year for individuals.
Currently the UK’s tax year runs from 6 April to the following 5 April for historical reasons and this has been the case for many years. Across businesses and internationally, it’s common to account to a month-end date.
Many countries use 31 December for their government accounts and the two most popular accounting dates for multinationals are the calendar year end date of 31 December and 31 March. The UK financial year for government accounting and for companies runs from 1 April to 31 March. Many major tax regimes including the USA, France and Germany have a tax year end date of 31 December.
On 15 September OTS presented its findings on the issue of a change in the UK tax year end date in a paper entitled ‘The UK tax year end date: exploring the potential for change’.
What are the main findings?
This date is of course embedded in tax and non-tax legislation. It is the date also used by the Department of Work and Pensions for NIC contribution purposes and the upgrading of benefits. Universal credit is also based on tax year earnings.
Changing the tax year date for individuals to 31 March would have implications for Income Tax, National Insurance contributions and Capital Gains Tax. All of these taxes on individuals (and employers in the context of National Insurance contributions) operate by reference to a 6 April to 5 April tax year, as do allowances, exemptions and rates for Inheritance Tax. Also the rules for residence are bound by the existing tax year.
What are the benefits?
A move to 31 December would have the tangible benefit of helping HMRC make considerably better use of internationally exchanged tax-related data in supporting taxpayers in fulfilling their obligations and in their compliance work. This data includes data shared under the Common Reporting Standard.
It’s likely that continued globalisation and continued growth in exchange of data between tax authorities will only increase the importance of having a common tax year with major trading partners.
The benefits of changing the tax year that have been identified by the OTS relate mainly to individuals who will be filing reports under Making Tax Digital (MTD) for Income Tax, which is scheduled to start from 6 April 2023.
However, the report mentions that it would not in any case be feasible to change the tax year end date before the scheduled 5 April 2023 start date of Making Tax Digital for Income Tax.
What about closer to home?
Wealth and investment managers would be able to provide annual tax reports for clients to 31 March, either in conjunction with, or as part of a usual quarterly or half-yearly investment report, rather than as a free-standing exercise.
An alternative to this wholesale change would be to introduce specific measures for those individuals – principally some of the 7.8 million total of self-employed people and landlords – who could potentially benefit the most from a move to a 31 March year end.
This suggestion, made to the OTS, has been prompted by the forthcoming changes to Income Tax reporting requirements when MTD for Income Tax is introduced in 2023, as some of the 469,000 taxpayers who are both self-employed and a landlord may have a burdensome number of filing deadlines. It is also likely that many self-employed taxpayers and landlords are already using 31 March as a cut off for income and expenditure in practice, so formalising the ability to adopt this approach is likely to be helpful for both taxpayers and HMRC.
How has it been done before?
Changing the tax year end date to 31 March is likely to be a complex and expensive process, with significant financial repercussions for both the public and private sectors.
An example of a country that made the change is Ireland which moved its tax year end date from 5 April to 31 December. The transitional year for this move was 6 April to 31 December 2001 as the new financial year was due to start on 1 January 2002, meaning that there was a shorter 9-month (39 week) tax year.
The Irish government chose to absorb much of the cost rather than implement complicated rules. Ireland also changed its financial year date at the same time. The cost to the UK is expected to be in the range of £0.4bn to £2.2bn and in the present environment one can see the treasury being reluctant to incur any cost at all.
What’s the next step?
If the government moved the financial year to 31 December this would result in a major overhaul to a very wide range of government and wider public sector systems and processes. The government would also have to amend a wide sweep of legislation. The OTS has been told that this would be difficult, costly, time and resource intensive, and need a very long lead time.
Any calculation software would need to be amended to deal with the change; in many cases twice, once in respect of the transitional shortened period and again for the new tax year date. The costs of these changes are likely to be passed to clients.
It therefore seems that in the short term a solution will be found for the smoother implementation of MTD while the formal adoption of 31 March or more unlikely 31 December must wait another day.