Time to ditch quirky 5 April tax year end

The UK should abandon its peculiar 6 April – 5 April tax year and move to a more modern and logical tax year, says the Chartered Institute of Taxation (CIOT).

The CIOT’s comments follow the publication of a report by the Office of Tax Simplification (OTS)¹ today which states that there would be “clear advantages from having a different tax year end date”. While keeping a 31 December year end on the table as a long-term option, the OTS recommends that in the short-term the government puts in place arrangements to enable self-employed taxpayers and individual landlords to use 31 March in place of 5 April when reporting their income, ahead of Making Tax Digital for Income Tax, which comes in in April 2023.

The UK is very rare in having a 5 April tax year end. The reasons for this 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 mis-match over leap years in the new and old calendars. Most other countries, including the USA, France, Germany and Ireland, align their tax years to the calendar year.

John Barnett, Chair of CIOT’s Technical Policy and Oversight Committee, said:

“The Government’s 10-year review of the UK’s Tax Administration Framework is a golden opportunity to ‘think big’ about modernising the UK’s tax system and for the government to consult on moving the tax year end from 5 April – either to 31 March or 31 December.

“In CIOT’s view it is time for the UK to make this change. Retaining a 5 April tax year end makes life harder for taxpayers and increasingly complicates interactions with other countries’ tax systems.

“However the government should proceed carefully. Changing the tax year should be a longer term plan – perhaps over four or five years – because there will be costs and transitional rules to address and individual taxpayers, businesses, tax advisers, accountants, HMRC and other government departments will need time to prepare. A cautious approach is also needed to avoid confusing and overwhelming taxpayers because of ongoing reforms such as, potentially, basis period reform in 2022 – which involves changing the time period for which a sole trader or partnership pays tax each year – and Making Tax Digital for Income Tax Self Assessment which starts in 2023.”²

John Barnett continued:

“Changing to 31 March is probably easier than 31 December because it is only five days different to current 5 April tax year end, which is not much of a change if you are a sole trader, for example, and currently have a 5 April year end. But we would like 31 December considered seriously, too, given that it is used by much of the rest of the world and is likely to be more easily understood by taxpayers in general since it coincides with the calendar year. However, we recognise that there will be significant costs and impacts attached to both options.”

On the international aspects, John Barnett added:

“There is a risk of international tax leakage that comes with the UK’s unusual tax year. It makes it harder for HMRC to match up the data that is coming in under exchange of information agreements from other tax jurisdictions, many of which use a 31 December year end. This hinders their compliance activity and is a nuisance for taxpayers who might receive an inappropriate ‘nudge’ letter because HMRC are not able to match the data correctly.

“The UK’s odd tax year also makes tax calculations more complicated for individual taxpayers who interact with other jurisdictions, for example internationally mobile employees and people who were not born in the UK. This includes difficulties reconciling overseas income which may have been calculated using a 31 December year end. There is a significant number of such people in the UK.

John Barnett added:

“The other international aspect is that some taxpayers coming to the UK can find themselves ‘not resident anywhere’ (NRA) in the period between 1 January (when their old country no longer considers them resident) and 6 April (when, if split year does not apply, the UK first considers them to be resident). In general, being NRA causes practical complications for taxpayers. In limited cases taxpayers might be able to exploit such status. Changing the tax year to 31 December would help address this problem (31 March would not).  But the extent of deliberate exploitation here is, in our experience, not particularly significant (mainly because of the practical complications which it causes) – so this is not enough of a reason to go for 31 December rather than 31 March.”