It is safe to say the fact that the UK income tax year ends on 5 April makes it unique internationally. It is also safe to say that this choice of year end creates all sorts of problems every year, and for this reason the Office of Tax Simplification (OTS) is looking at the possibility of changing the tax year end to something more closely aligned to other countries.
Emperors and Popes
But why does the UK tax year end on 5 April in the first place? The answer goes back to the move from the Julian calendar to the Gregorian calendar in the UK in the 18th century. Before then rents were due and bills settled, including tax, on Lady Day, 25 March. The change in calendar moved the date forward by 11 days so, to maintain the 12-month tax period, the tax year end date was moved to 5 April.
While it’s an interesting back story, this date doesn’t align with common accounting periods or indeed common sense, often requiring apportionments, accruals and creating various other additional complications.
The case for change
While the Government has recently announced a consultation on changing basis periods for unincorporated businesses, the OTS previously announced that it is going to look at the impact of changing the UK income tax year end to 31 March or 31 December. The March date is just a few days’ adjustment, aligns with the UK government’s financial year and might not alter most of the familiar filing dates. The December date is used by many countries such as the USA, France, Germany, China, Japan, Spain and Ireland. Other countries are different, such as Australia with a 30 June year end and South Africa with 28/29 February year end.
The key question is whether this really matters any more.
Most employees pay their tax weekly or monthly through PAYE. Companies pay their tax in line with their financial year end (nine months afterwards unless they have to pay by instalments), capital gains tax payments on residential and some other property sales are due within 30 days of sale, and generally the move is towards making tax digital for VAT and other taxes.
On the other hand, we live in an international world. Wealth managers based outside the UK are unlikely to be set up to provide reports to 5 April, and there is a time or cash cost to converting to UK requirements. Anyone required to file tax returns in more than one country can face additional costs where year ends don’t match. It’s also very easy for things to get lost in translation , which can result in expensive enquiries and substantial penalties later on.
Savings, but at a cost
As with changing basis periods for unincorporated businesses, changing the tax year-end is not a cost-free exercise. Consider the changes to software required by individuals and businesses, the time spent working out how to deal with gap or overlap periods, changes to HMRC’s systems and manuals, the media campaigns notifying taxpayers, even the parliamentary time debating and changing legislation. The OTS aim of simplifying taxes would definitely be helped by changing the UK tax year, but one has to feel that maybe there are more important problems with the tax system that should be addressed first.
For more information please get in touch with Andrew Robins.