There are clear benefits in adopting a tax year that is either aligned with the calendar year or with a calendar month-end, says a new report from the Office of Tax Simplification (OTS)
This is especially true, it said, given the increasing automation, internet-enabled commerce and digitisation of financial information and accounting systems generally.
However, the costs of change are significant, both in terms of the financial cost and the opportunity cost. Whether moving to 31 March or 31 December, the work involved would consume government and private sector resources and make it much harder to implement other changes at the same time. A move to 31 December could also require changing the UK’s financial year.
OTS stressed a tax year aligned to the calendar year would be the natural, simplest and easiest approach for everyone to understand. It would align with the approach in many other countries and support improvements in the use of international data to help taxpayers in fulfilling their obligations. It would also help individuals who move internationally (and, where relevant, their employers), or who have an overseas income.
Moving to 31 March would also be much more understandable, align with the UK’s financial year, and assist taxpayers who prepare business accounts or report income from investments. The system's impact of such a change, for government and the private sector, could be compared with those for a change to 31 December, but the overall scale of what would be involved in a change to 31 March would be lower.
The OTS considers that any change would be best carried out after major projects such as the Single Customer Account have been completed. It would in any case not be feasible to change the tax year end date before the scheduled 5 April 2023 start date of Making Tax Digital for Income Tax.
While the OTS does not consider such a change should take place in the immediate future, the OTS recommends that in the short-term the government and HMRC pursue ways to formalise arrangements to allow (or even require) taxpayers to use a 31 March cut off to stand in for 5 April in respect of the calculation of profits from self-employment and from property income, ahead of the implementation of Making Tax Digital for Income Tax.
Bill Dodwell, OTS Tax Director said: “It’s been stimulating to explore this issue, which has been of long-standing interest to many given the curiosity aroused by the UK’s use of a tax year running from 6 April to 5 April. Despite our having carried out our review over a short period, many people have got in touch to share their insights and experience. A clear majority of those responding to us thought that the UK should adopt a different year end - but there was a range of views on whether to move to 31 December or to 31 March. This has been borne out by a range of surveys.
“There would be clear advantages from having a different tax year end date, but as the transitional costs and impacts are significant, it would require detailed advance planning. If the government were to make a change, it would also be important to ensure the timing did not derail existing change programmes such as work on the Single Customer Account. So, while we do not consider such a change should take place in the immediate future, it is not too early to start some long-term planning if the government were to consider taking this forward.”