The UK tax system has a fine tradition of quirks, but the notion that an individual’s tax affairs timetable should be set by the switch to a different calendar back in the 18th century has always raised an eyebrow. This is why the Office of Tax Simplification (OTS), living up to its name, has put out a scoping document looking at changing the date from 5 April to either 31 March or, even more radically, 31 December.
As the OTS admits, the UK’s modern tax system and infrastructure have been developed around 5 April, a date created by a switch in calendars 269 years ago.
To quote the BBC’s History Magazine: ‘The people of Britain and its empire went to sleep on 2 September 1752 and woke up on the 14th.’ The Gregorian calendar had been adopted the previous year, replacing the astronomically flawed Julian calendar, and a discrepancy between the two meant 11 days had to be lost.
It is the similar feeling to losing an hour’s sleep every spring as the clocks are moved forward, but on a much grander scale.
Shortening the tax year by five days would mean the ‘loss’ of £4.66bn
Of course, no time has actually been ‘lost’, but is there a risk that the government could lose vital tax revenue as a result of a possible change in year-end date? The Office for Budget Responsibility (OBR) predicts that the government will raise £340bn in income tax and national insurance (the biggest single contributor to the UK’s coffers) in the 2021/22 financial tax year.
Shortening the tax year by five days would mean the ‘loss’ of £4.66bn, a figure that grows to £88.5bn if the year is cut back by a further three months. This could set up a bit of a cashflow problem for the UK government.
The quirk exists due to ‘quarter days’; rents in particular were traditionally paid every three months, on 25 June, 25 September, 25 December and 25 March, with this last date marking the end of the old financial year. So, when the new calendar was introduced, the financial year shifted to 5 April. But just to add to the quirkiness, the quarter days remain – perhaps one reason why there tends to be at least one major corporate collapse just before Christmas, when a large rent bill becomes due.
‘While it’s an interesting back story, this date doesn’t align with common accounting periods or international tax years, often causing apportionments and various other additional complications,’ says RSM’s employee tax partner Fiona Bell.
The UK financial year for government accounting runs from 1 April to 31 March, but many other countries use 31 December for their government accounts. The two most popular accounting dates for multinationals are the calendar year end date of 31 December and 31 March, and the vast majority of companies at least account to a month-end date.
‘The move towards in-year filing and tax collection suggests the year end makes little difference anymore’
Time to simplify
So, the OTS is undertaking a high-level exploration and analysis of the benefits, costs and wider implications of a change in the date of the end of the UK tax year for individuals. It will publish a report later this summer. While primarily addressing tax simplification issues, the review will also take account of the implications of any change in other areas, such as tax credits and benefits.
The OTS says that changing the tax year end to 31 March would mean the transitional year – the first year of the change – would be shortened by five days and run from 6 April to the following 31 March. But if the switch was made to a calendar year end, then the transitional year would be shortened by three months and five days, and run from 6 April to the following 31 December.
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 property sales are due within 30 days of a property sale, and generally the move is towards Making Tax Digital for VAT and other taxes.
Is it worth it?
‘The key question is whether this really matters any more,’ Bell says. ‘Changing the tax year-end is not a no-cost administrative exercise. Consider the cost of the changes to the HMRC systems and manuals, the media campaigns notifying taxpayers, changes to software by individuals and businesses, the parliamentary time debating and changing legislation.
‘Tinkering with the year-end might have been helpful to simplify some tax calculations in Jane Austen’s times. However, in the digital era, there are programs and apps that can easily sort this out. The move towards in-year filing and tax collection suggests the year end makes little difference anymore.
‘Putting this together, the Office of Tax Simplification might not live up to its name, and the government might consider alternative uses for its time and resources.’
Tax agents might welcome a move to a 31 December year end as this would at least allow them to enjoy Christmas and the New Year a bit more without fretting about the ‘busy’ season of January as everyone rushed to complete their self-assessment forms. Financial advisers might not be so impressed, however, as more people will be rushing to use up their ISA allowances over the festive period.
Farmers, whose working lives are governed more by quirks of the seasons than a calendar, might also face challenges. ‘Arguably, a change to either date would be an inconvenience, at least initially, and certainly in any transitional year,’ says Martyn Dobinson, Saffery Champness partner and a member of the firm’s landed estates and rural business group.
‘There could be complications where profit averaging or herd-basis accounting is used,’ he says. ‘We hope that the OTS will consider these provisions that are particular to the farming sector.’
However, Dobinson adds that, given that the Basic Payment Scheme – income support paid to farmers based on area of eligible land used for farming – runs from 1 January to 31 December, a move to mirror the calendar year could make sense for the farming sector.
It remains to be seen whether the OTS will follow the herd and recommend a change or whether its review falls on fallow ground.