The Office of Tax Simplification (OTS) has published analysis of the potential benefits, costs and implications of a change to the tax year.
The OTS review sets out its analysis of the benefits, costs, and wider implications of a change to the date of the end of the tax year for individuals.
There are concerns about the cost implications of any change to the current 5 April year end date.
The costs of change are significant, both in terms of the financial cost and the opportunity cost, the OTS said. 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.
The review considers the high-level implications of moving the tax year end date to 31 December, and a more detailed evaluation of the implications of a move to 31 March. It also considers potential short-term practical measures to facilitate the launch of Making Tax Digital for Income Tax.
If the government were to opt for a 31 December year end there would be significant impacts from the change. The OTS said: ‘It is because a three-month change, involving a transitional tax ‘year’ of just under nine months, would require transitional provisions to address the impact on the Exchequer and taxpayers, which could prove costly or complex. From the following year, the self-assessment deadline would move to 31 October, with comparable changes to other reporting and payment deadlines, with particular consequences for taxpayer, agent and HMRC workloads in that transitional period.’
Some changes to reporting measures are currently out for consultation as part of HMRC’s review of the basis period, which considers the option to treat 31 March and 5 April accounting dates as equivalent in relation to profits from self-employment.
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 report presents information and analysis to inform evaluation and debate about the implications of any potential change and its timing. It does not aim to make a specific recommendation about whether the tax year should change.’
‘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 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.
‘In the short-term, we recommend government and HMRC focus on arrangements to allow self-employed taxpayers and individual landlords to use 31 March in place of 5 April when reporting their income, to facilitate Making Tax Digital for Income Tax.’
There are clear benefits in adopting a tax year which is either aligned with the calendar year or with a calendar month-end, especially given the increasing automation, internet-enabled commerce and digitisation of financial information and accounting systems generally.
A tax year aligned to the calendar year would be the natural, simplest and easiest approach for everyone to understand, OTS said. 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 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.
However, the change would impact Treasury revenues. HMRC analysts provided indicative costings, in Exchequer revenue terms, of between £0.4bn and £2.2bn in lost tax for moving the tax year end date to 31 March.
One of the main concerns with Making Tax Digital for Income Tax, which affects landlords with property income, is that it will involve an increased administrative burden on taxpayers.
Changing the tax year end could reduce this as potentially there would be fewer reporting dates. A change of tax year to 31 March would reduce the number of months where filings are needed from eight down to four, as the property business reports would be due at the same time as the self-employed business reports.
The systems impact of such a change, for government and the private sector, could be comparable 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.
There are clear indications that the rollout of such a major change would take a minimum of two years to plan and implement the necessary IT upgrades. There would also be an impact on self-assessment filing deadlines, as these would have to change in line with revised year end reporting dates, particularly if a 31 December deadline was adopted.
The OTS does not consider such a change should take place in the immediate future but 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.
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