The British tax year originally started on the 25th of March, known as ‘Lady Day’, as it was the first ‘quarter day’ of the year on which debts had to be settled. In typical style, the Treasury then moved the tax year forward by the above mentioned 12 days, ensuring that the tax year remained 365 days to prevent any loss of tax revenue.
Over 220 years later and nothing has changed, perhaps until now. In the March 2020 Budget, Chancellor Rishi Sunak highlighted a 10-year strategy to create ‘a tax system fit for the challenges and opportunities of the 21st century’. The idea is to build a trusted, modern tax administration system, embracing digital technologies where possible.
To achieve this goal, significant long-term planning is required and major changes would need to be made, one of which could be moving the end of the tax year away from 5 April to a month end, most likely 31 March, or to the calendar year end.
In September 2021, whilst cautioning against an immediate change, the Office of Tax Simplification (“the OTS”) published two months’ worth of analysis covering the potential benefits, costs and implications of a change to the tax year. A clear majority thought that the UK should adopt a new tax year, however, there were a range of views as to whether the move should be to a 31 March or 31 December year end. Either way, the OTS suggested that it’s never too early to start long-term planning.
The results of the OTS’ analysis are summarised below.
As a calendar month end, 31 March would introduce a tax system more easily understood by the general public compared with 5 April. It would also align with the UK’s financial year, assisting taxpayers who prepare business accounts.
For both the public and private sectors, the knock-on effects of a change to 31 March could be comparable with those of a change to 31 December, however, the overall level of work required would be lower.
A tax year aligned with the calendar year would be the most natural approach for everyone to easily understand. It would align our tax year with the tax year of many other countries, enabling international exchanges of data between tax authorities. It would also help individuals who move internationally and, where relevant, their employers, in addition to those who have overseas income.
The OTS believe that adopting a tax year which is aligned with the calendar year or a calendar month-end would lead to increased automation and digitalisation of financial information. This is in line with the Government’s 10-year strategy of modernising our tax system and embracing digital technologies, and brings the country up to date with modern times rather than relying on a quaint system peculiar to the UK. In today’s multinational world, thing like this single the UK out as not being in line with the modern times.
The OTS also note that the costs associated with changing the UK’s tax year would be substantial and the level of work required would consume public and private sector resources, particularly for a change to 31 December, making it much harder to implement other changes to the tax system at the same time. A move to 31 December as opposed to 31 March could also require a change to the UK’s own financial year.
The OTS review was also surprisingly practical, noting that any change to our tax year would be better carried out after major projects such as the Single Customer Account have been completed. Furthermore, it would not be feasible to change the tax year before the scheduled 5 April 2023 start date of Making Tax Digital (MTD) Income Tax Self-Assessment, even though the introduction of MTD for income tax and corporation tax would be much easier with a 31 March or 31 December year end.
Overall, the OTS think changing the year end is in theory a good idea. While a change to a 31 March year end would be easier to implement, but would lack the advantage of international alignment, any such change to our year end is not likely to be on the cards in the immediate future, and certainly not while we are already faced with repaying the cost of COVID. That said, the Government do like a plan, so while 5 April remains safe for the time being, it may be that plans are put underway to look again at a change in a few more years.
At Claritas, we agree wholeheartedly with the OTS comments that there are a number of other projects underway that need to be completed first. Whether the tax year changes or not, it will still be important to get tax planning done at the right time and in the right way, so we will simply deal with it if/when it happens in the best way for our clients.
Will there be a change to our tax year by 2030? If so, will it be a change to a 31 March or 31 December year end? Let us know what you think.
The full analysis carried out by the OTS can be found here
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