The benefits of changing the UK’s odd tax year date of 5th April and aligning it with the calendar year may be obvious, but would it be worth the considerable upheaval and cost that this would entail?
HMRC recently concluded a consultation exercise on the possibility of changing the assessment period for interest earned on foreign bank accounts. This has stimulated a renewed debate as to whether it’s now time to seriously consider moving our tax year end to 31st December, as recommended by the Office of Tax Simplification (OTS) in a 2021 report.
The OTS report finished with the conclusion: “There are clear benefits in adopting a tax year which is either aligned with the calendar year or with a calendar month-end. However, the costs of change are significant. The work involved to make such a change would consume government resources and make it much harder to implement other changes at the same time, plus a move to 31st December could also require changing the UK’s financial year.”
The Chartered Institute of Taxation (CIOT) has issued its own response to HMRC’s consultation and has also called on the government to consider looking at this again. CIOT point out that internationally, the UK is alone in using 5th April as its tax year end and the date looks increasingly antiquated and illogical.
A brief history lesson
The reasons for our unusual tax year date back to the Middle Ages, when the UK’s tax year began on the religious festival of Lady Day on 25th March. Several hundred years later, it was moved to 5th April in 1752 as part of the UK’s switch from the Julian to the Gregorian calendar.
Most other countries, including the USA, Japan, Canada and the EU, align their tax years to the calendar year, although there are a handful of countries like India and Australia that use other dates, such as 31st March or 30th June. Ireland used to have a 5th April tax year until 2002, when it had to change both the tax year end and the country’s financial year, when it adopted the euro.
International problems
Most data shared under international automatic exchange of information agreements (AEOI), is shared on a 31st December basis, even by countries like the UK that do not have a 31st December year end. This was the primary reason that prompted HMRC to issue its recent consultation document.
Receiving data on overseas investment income on a 31st December basis makes it hard for HMRC to match it to the figures reported by taxpayers on their UK tax returns with a year-end that differs by 95 days. The problems caused by allocating income and gains and thus identify whether returns are correct or not, explains why many of HMRC’s offshore compliance nudge letters miss their target.
Taxpayers, particularly those without an accountant to help them, can find the 5th April assessment rule for offshore income confusing, especially as most receive the figures from their overseas bank on a calendar year basis. In reality, many people already report their overseas investment income on a 31st December basis, rather than trying to apportion figures from two different years, with this approach rarely challenged by HMRC.
Offshore income
HMRC’s proposal is to change the assessing period only for offshore interest from 5th April to a calendar-year basis, so that the interest taxable in a UK tax year would be the amount received in the calendar year ending in that tax year. The CIOT however, considers that it should apply to all overseas investment income shared under AEOI, not just interest.
Clearly, having a different basis of assessment for offshore income compared to UK source income could be confusing in itself, particularly so as all businesses, whatever their year-ends, now have to report profits in line with the tax year (known as the basis period reform), so any change would need to be very carefully explained and communicated.
Is there a solution?
Looking at the wider picture, more and more data is being shared internationally between tax jurisdictions, and multinational businesses operating and investing in the UK would no doubt find it much easier if our tax year end mirrored the vast majority of global tax years ends. It is also likely to make inward investment into UK plc, more attractive, especially for US businesses. There are also many potential benefits for all taxpayers, which is why both the OTS and the CIOT concluded that a change to 31st December is the best overall solution.
Unfortunately, there is little political will to tackle such a huge challenge, partly due to the scale of the task and partly because of the likely costs of such a fundamental change. As a result, change is unlikely to feature high on the list of priorities competing for the Chancellor’s attention. Ms Reeves is likely to do nothing in the short-term and continue as we are, perhaps making minor tweaks here and there.
The issues that arise as a result of our quirky tax year end, will inevitably only increase over time. Our new political masters are currently preoccupied with how to find the money to increase spending on defence and fixing the issue of social care. These issues are enough to deter any government, but unfortunately for Mr Starmer and Ms Reeves, booting the issue into the long grass is not be the right choice in the long run.
Accountant’s view
Any government faced with an issue that will have clear cost-saving benefits and boost inward investment into the UK trade but be difficult and expensive to implement, will inevitably take the easy option of kicking the can down the road and leaving it for ‘the other lot’ to sort out.
Is it now time to change the tax year end?
The benefits of changing the UK’s odd tax year date of 5th April and aligning it with the calendar year may be obvious, but would it be worth the considerable upheaval and cost that this would entail?
HMRC recently concluded a consultation exercise on the possibility of changing the assessment period for interest earned on foreign bank accounts. This has stimulated a renewed debate as to whether it’s now time to seriously consider moving our tax year end to 31st December, as recommended by the Office of Tax Simplification (OTS) in a 2021 report.
The OTS report finished with the conclusion: “There are clear benefits in adopting a tax year which is either aligned with the calendar year or with a calendar month-end. However, the costs of change are significant. The work involved to make such a change would consume government resources and make it much harder to implement other changes at the same time, plus a move to 31st December could also require changing the UK’s financial year.”
The Chartered Institute of Taxation (CIOT) has issued its own response to HMRC’s consultation and has also called on the government to consider looking at this again. CIOT point out that internationally, the UK is alone in using 5th April as its tax year end and the date looks increasingly antiquated and illogical.
A brief history lesson
The reasons for our unusual tax year date back to the Middle Ages, when the UK’s tax year began on the religious festival of Lady Day on 25th March. Several hundred years later, it was moved to 5th April in 1752 as part of the UK’s switch from the Julian to the Gregorian calendar.
Most other countries, including the USA, Japan, Canada and the EU, align their tax years to the calendar year, although there are a handful of countries like India and Australia that use other dates, such as 31st March or 30th June. Ireland used to have a 5th April tax year until 2002, when it had to change both the tax year end and the country’s financial year, when it adopted the euro.
International problems
Most data shared under international automatic exchange of information agreements (AEOI), is shared on a 31st December basis, even by countries like the UK that do not have a 31st December year end. This was the primary reason that prompted HMRC to issue its recent consultation document.
Receiving data on overseas investment income on a 31st December basis makes it hard for HMRC to match it to the figures reported by taxpayers on their UK tax returns with a year-end that differs by 95 days. The problems caused by allocating income and gains and thus identify whether returns are correct or not, explains why many of HMRC’s offshore compliance nudge letters miss their target.
Taxpayers, particularly those without an accountant to help them, can find the 5th April assessment rule for offshore income confusing, especially as most receive the figures from their overseas bank on a calendar year basis. In reality, many people already report their overseas investment income on a 31st December basis, rather than trying to apportion figures from two different years, with this approach rarely challenged by HMRC.
Offshore income
HMRC’s proposal is to change the assessing period only for offshore interest from 5th April to a calendar-year basis, so that the interest taxable in a UK tax year would be the amount received in the calendar year ending in that tax year. The CIOT however, considers that it should apply to all overseas investment income shared under AEOI, not just interest.
Clearly, having a different basis of assessment for offshore income compared to UK source income could be confusing in itself, particularly so as all businesses, whatever their year-ends, now have to report profits in line with the tax year (known as the basis period reform), so any change would need to be very carefully explained and communicated.
Is there a solution?
Looking at the wider picture, more and more data is being shared internationally between tax jurisdictions, and multinational businesses operating and investing in the UK would no doubt find it much easier if our tax year end mirrored the vast majority of global tax years ends. It is also likely to make inward investment into UK plc, more attractive, especially for US businesses. There are also many potential benefits for all taxpayers, which is why both the OTS and the CIOT concluded that a change to 31st December is the best overall solution.
Unfortunately, there is little political will to tackle such a huge challenge, partly due to the scale of the task and partly because of the likely costs of such a fundamental change. As a result, change is unlikely to feature high on the list of priorities competing for the Chancellor’s attention. Ms Reeves is likely to do nothing in the short-term and continue as we are, perhaps making minor tweaks here and there.
The issues that arise as a result of our quirky tax year end, will inevitably only increase over time. Our new political masters are currently preoccupied with how to find the money to increase spending on defence and fixing the issue of social care. These issues are enough to deter any government, but unfortunately for Mr Starmer and Ms Reeves, booting the issue into the long grass is not be the right choice in the long run.
Accountant’s view
Any government faced with an issue that will have clear cost-saving benefits and boost inward investment into the UK trade but be difficult and expensive to implement, will inevitably take the easy option of kicking the can down the road and leaving it for ‘the other lot’ to sort out.
Latest Post
Tax News Categories
MJ & Co support businesses at every stage
We provide expert advice for all size businesses.
Have questions or need expert advice? Our team at MJ & Co Accountants is ready to assist.
Whether it’s a query about our services, a specific accounting challenge, or a request for a consultation, we’re here to offer personalised support.