This article, "Has the time come to change the UK tax year?," originally appeared on AccountingWeb.com.
HMRC’s recent consultation on changing the assessment period for offshore interest has generated renewed interest in the idea of moving the UK tax year from 5 April to 31 December.
Readers may remember that the Office of Tax Simplification (OTS) published a report in 2021, The UK tax year end date: exploring the potential for change, which looked at the pros and cons of changing the tax year. The OTS concluded: “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, and a move to 31 December could also require changing the UK’s financial year.”
The Chartered Institute of Taxation (CIOT) in its response to HMRC’s consultation has called on the government to consider looking at this again and reiterated its proposal in a press release at the beginning of the year. After all, the UK is alone internationally in using 5 April as its tax year end and the date looks increasingly antiquated and illogical.
Historic origins
The reasons for our unusual tax year date back to the Middle Ages, when the tax year began on Lady Day (25 March), a religious festival. It was moved to 5 April in 1752 as part of the UK’s switch from the Julian to the Gregorian calendar, then moved to 6 April in 1800 because of a mismatch over leap years in the new and old calendars. Most other countries, including the USA, Japan, France and Germany, 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 31 March or 30 June.
Interestingly, Ireland used to have a 5 April tax year too but changed it (and its financial year) when it adopted the euro in 2002.
International concerns
Another interesting fact is that most data shared under international automatic exchange of information agreements (AEOI), such as the Common Reporting Standard, is shared on a 31 December basis, even by countries like the UK that do not have a 31 December year end. This is one of the reasons that prompted HMRC to issue its recent consultation document.
Receiving data about overseas investment income on a 31 December basis makes it hard for HMRC to match it to the figures reported by taxpayers on their UK tax returns (which are on a 5 April basis) and identify whether returns are correct or not. This explains why some of their offshore compliance nudge letters miss their target – and agents end up with an unhappy client on their hands.
Taxpayers, particularly those without an agent to help them, can find the 5 April assessment rule for offshore income confusing, especially if they receive the figures from their overseas bank on a calendar (or some other) year basis. We hear that in practice a lot of people already report their overseas investment income on a 31 December basis, rather than time apportioning figures from two different years, and that this approach is rarely challenged by HMRC.
Offshore income
HMRC’s latest proposal is to change the assessing period solely for offshore interest from 5 April onto 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 thinks that, if introduced, 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 coming on the heels of basis period reform, so any change would need to be very carefully communicated.
Overall solution
But 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 easier if our tax year end mirrored the vast majority of global tax years ends. It is these factors, as well as the wider potential benefits to all taxpayers, that led the CIOT to conclude that aligning the tax year itself to 31 December could be the better overall solution.
Of course, we are not naïve. There is probably little political will to tackle such a huge challenge – the scale of the task and potential costs of such fundamental change are enough to deter any government – and we imagine that it is unlikely to feature high on the list of priorities competing for the Chancellor’s attention. The alternative is to continue as we are, perhaps making minor tweaks here and there – but we envisage that the problems our peculiar tax year end creates can only increase as time goes on. Kicking it into the long grass might not be the right choice in the long run.