Tax Year-End Changes – In June 2021 Office of Tax Simplification (OTS) issued a review summarizing the potential impact of changes in the tax year-end date on taxpayers, its costs, benefits, and long-term implications. It also considers the short-term proceedings to facilitate the launch of Making Tax Digital (MTD) for income tax.
UK’s Present Tax System
The UK’s tax year-end for taxpayers runs from April 6 to April 5 of the following year, and the present tax system and infrastructure in the UK revolve around this date.
On the contrary, across businesses and internationally, it is a common practice to account for a month-end or a quarter-end date.
Many countries use December 31 as their year-end for Government accounts, and the other most popular date for year-end closure for multinationals is March 31.
The end date of the UK financial year is from April 1 to March 31, according to which the UK Government compiles its accounts.
The Focus of the review
The Office of Tax Simplification is conducting high-level research and inspecting the advantages, drawbacks, and broader implications of changing the UK’s tax year-end for individuals.
While this proposal primarily addresses tax simplification issues, it will also consider the effects of any change in other areas, such as tax credits and benefits.
This review considers a detailed evaluation and high-level implication of moving the date to December 31 and March 31.
March 31
The Office of Tax Simplification will evaluate the consequences of moving the tax year-end date from April 5 to March 31 and address practical issues relating to the UK’s current tax year-end date.
Changing the tax year-end to March 31 would mean that the first year following the change (the transitional year) would be five days shorter and run from April 6 to March 31 of the following year.
March 31 is the nearest month-end date to the current tax year-end date and is also the UK financial year-end date, according to which the UK government works out its accounts and regarding which corporation tax rates apply.
There will be principal benefits in aligning the UK’s tax year with the current financial year. The implementation and administration costs will be lower than changing the tax year-end date to December 31.
December 31
Alternatively, the Office of Tax Simplification will formulate the principal wider drawbacks, costs, and benefits that would need to be evaluated if the end of the tax year were to move to December 31.
In this scenario, the transitional year would be compressed by three months and five days and will cover from April 6 to December 31.
Many major tax systems like the USA, France, and Germany have a tax year-end date of December 31. Ireland has already changed its government accounting and tax year-end date from April 5 to 31 December 2002.
Aligning the tax year-end date with the calendar year seems the easiest and simplest date for taxpayers to understand their tax affairs. It may also be significant to align the tax year with major world jurisdictions like Europe and America.
Simplification for Taxpayers
The OTS report suggests that tax simplification could be achieved by formally treating the self-employed individuals having tax year-end between 1-5 April as being March 31. Furthermore, HMRC permits taxpayers to treat March 31 concurrent with the current tax year-end date of April 5. Many self-employed individuals, including Partnerships and Limited Liability Partnership, are using March 31 as their accounting year-end.
Landlords report their rental income and expenses in their tax returns between April 5 and April 6 each year. Those landlords who are self-employed must sign up for MTD for Income Tax Self Assessment (once it becomes mandatory); they could also adopt March 31 as their year-end.
Commenting on tax year-end changes, Bill Dodwell, Office of Tax Simplification Tax Director, said:
“In the short-term, we recommend government and HMRC focus on arrangements to allow self-employed taxpayers and individual landlords to use March 31 in place of April 5 when reporting their income, to facilitate Making Tax Digital for Income Tax.”
Further Details of the Review
In the reviewing the matter, the Office of Tax Simplification will:
- Specifically scrutinize the effect on Income Tax, PAYE, National Insurance Contributions, Capital Gains Tax, and Inheritance Tax
- Taking into consideration the implications for the Exchequer, the tax gap, and compliance
- Appraise the implications for HMRC, including the operation of their systems, and financial and administrative consequences for taxpayers, employers, and businesses
- Take account of the implications for areas concerning individuals, partnerships, trusts, and other government departments and administrations.
Key Findings
Given the increased automation and digitization of financial information, there are direct advantages in acquiring a tax year-end date in line with the calendar year or with a calendar month-end. There are also significant financial and opportunity costs attached to it.
Whether moving to March 31 or December 31, the work involved would require increased government and private sector time and resources, and at the same time, it would be much harder to implement other changes, especially in the transitional year. Moving to December 31 might also demand altering the UK’s financial year.
The review did not specifically recommend whether such a move should be taken or not. Instead, it highlights the information required and issues involved in evaluating any potential change and its timing.
It might appear helpful for the Government to implement tax year-end changes, while the Office of Tax Simplification considers this to be impractical in the short term until after the current major digital projects have been implemented.
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