4 June 2021
The Office of Tax Simplification (OTS) has today announced a plan to review the potential for moving the UK tax year. The review will look into the benefits, costs and wider implications of changing the date of the end of the UK tax year for individuals from the current 5 April to either 31 March or 31 December.
What is the focus of the review?
The main focus of the review will be on the 31 March date as this is both the end of a calendar quarter and the closest month end to the end of the current tax year. It is also the financial year end date for the UK government and the date used for corporation tax rate changes.
Why change the tax year?
The current tax year end date of 5 April dates back to a change to the UK calendar in 1800. Although the UK’s tax and accounting systems have developed around this date, businesses and most global tax systems tend to account to a month and quarter end date, with the majority of countries using the calendar year as their tax year, ending on 31 December. Other countries have made this change - for example, Ireland moved its tax year end from 5 April to 31 December in 2002 and in 2019 Costa Rica switched from a 30 September year end to 31 December.
What are the implications of changing the tax year?
The OTS will look at how the change to the tax year could impact on tax collection and compliance, in particular in relation to income tax, PAYE, national insurance contributions, capital gains tax and inheritance tax. Amongst other issues, the review will also look into the financial and administrative implications for stakeholders (taxpayers, employers and businesses) and the practical implications of the change on IT systems operated by government departments. Any change will also have to take into account the views of the devolved governments of Northern Ireland, Scotland and Wales.
Would there be a long or short first tax year?
The expectation is that whichever date is chosen, the first tax year following the change (the transitional year) will result in a shorter tax year. If the tax year ends on 31 March, the transitional year would be shortened by five days and run from 6 April to the following 31 March. If the year end was moved to 31 December, the transitional year would be shortened by three months and five days and run from 6 April to the following 31 December.
What is the timing?
The OTS will publish its report this Summer.
If it wasn’t June, we might have mistaken this for an April Fool’s Day joke!
Although many countries do use a 31 December tax year end (including the US and all EU countries), there are a number which have kept historic tax year dates. These include countries with which the UK has strong links such as Australia (ends 30 June), New Zealand and India (both end 31 March). However, all those countries do account to a quarter end date. It is rare for a country to have a tax year that does not end at the end of a month (we can think of Ethiopia, Iran and Nepal) and the OTS is looking to operate to its brief, in simplifying the structure by bringing the UK tax year for individuals into line with the government tax year.
The report from the OTS is expected this summer but remember that the OTS is only an advisory body and any changes to the tax year will ultimately be decided by the government. We will be watching with interest and you can be sure that we will let you know the outcome of the review.
If you would like to discuss this update, or anything else, please do contact us.
Hannah Needle and Sharon Thwaites