An update on whether the UK could change its tax year
In his article, 'Could the UK really change its tax year?' Andrew Robins provided insight earlier this year on the Office of Tax Simplification (OTS) considering the possibility of the UK tax year changing so that it is more aligned to other countries.
The OTS report
The OTS has now issued its report, Exploring a change to the UK tax year end date, which sets out its analysis of the benefits and costs, and the financial and wider implications of a change from the current 5 April tax year end date.
The OTS report is a comprehensive document, with the following key messages.
Timing of potential changes
The report makes a clear statement that any change to the UK tax year should not be made until after current major digital projects have been implemented. It identifies that any revised UK tax year will require several years’ lead time to implement the necessary changes to government and business systems and legislation.
The OTS states that it would not be feasible to change the tax year end date before making tax digital for income tax self-assessment (MTD for ITSA) reporting becomes obligatory in 2023. The date from which MTD for ITSA will be mandated has subsequently been delayed until April 2024 at the earliest and we do not expect any change to the UK tax year until after that time.
The OTS report considers:
a 31 March tax year end date;
a 31 December tax year-end date; and
potential simplifications for taxpayers with self-employment and/or rental income if the current tax year end date is retained.
31 March tax year end date
The principal benefits of this date are that the UK tax year would align with the Government’s current financial year and implementation costs will be lower compared with a 31 December tax year end date.
31 December tax year end date
Aligning the tax year with the calendar year was considered the simplest and easiest for taxpayers to understand and there could be significant benefits in aligning the UK tax year with other jurisdictions in Europe and America, making the exchange of tax reporting information much easier between jurisdictions.
Simplification for taxpayers with self-employment and/or rental income
Many self-employed individuals, including partners in partnerships and LLP s have adopted a 31 March accounting year end and, by concession, HMRC generally allows taxpayers to treat this as being coterminous with the current 5 April tax year end date.
The report proposes that simplification could be achieved by formally treating the accounting year end of all self-employed taxpayers with 1-5 April year ends as being 31 March, but at the same time considering this as coterminous with the current 5 April tax year end date.
Currently, landlords are generally required to report rental income and expenses arising in the tax year (ie for the period between 6 April and 5 April each year) in their tax returns. As a further simplification, which would particularly benefit those landlords who are also self-employed and must adopt MTD for ITSA when it becomes mandatory, the report proposes that landlords could instead report their income for the year ended 31 March each year on their tax returns, with this being treated as coterminous with the current tax year end date, as proposed for self-employed individuals.
In addition to the delay to introducing MTD for ITSA, the Government has also confirmed that its proposals for changing income tax basis periods to a tax year basis have also been delayed by one year. The transition year for these reforms will not commence before 6 April 2023 at the earliest.
While it might initially appear helpful for the Government to implement changes to basis periods and tax years at the same time, the OTS considers this to be impractical in the short term given current major digital projects and hence, this is unlikely. Whilst introducing the proposed simplifications may help with a subsequent move in the tax year end date to 31 March, if there is a move to a 31 December tax year in the future, this is likely to lead to further complexity and time costs to calculate taxable profits in the year of transition.
We do not expect a change in the UK tax year any time soon. The impact on government resources of implementing such a change and the costs associated with it are too significant for it to be done in the short term while the country is still in the midst of the coronavirus pandemic. However, some of the practical simplifications to address issues with the current tax year end seem more likely to be seen in the coming years.