Simplification of tax years and accounting periods?

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06 August 2021

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The Office of Tax Simplification has reviewed the benefits, costs and wider implications of changing the end of tax year date for individuals from 5 April to 31 March. The review also considered potential alternative approaches to addressing practical issues connected with the UK’s tax year running to 5 April.

Sally Reed, Managing Partner, looks at the broader issues, costs and benefits that would need to be considered if the end of the tax year were moved to 31 December and how accounting periods could make things more complicated, rather than simplified.

Simplification (or not?) of tax years and accounting periods

The government is keen that the UK becomes a leading digital nation, set to bring in ‘making tax digital’ (MTD) measures not only for small businesses but also for reporting other types of income such as rental. This drive to make all things digital is beginning to clash with our history – such as why on earth we have a tax year ending on 5 April each year.

5 April doesn’t work well with software, which is much better able to deal with calendar months. HMRC have in the past accepted that for the most part 31 March and 5 April can be treated as the same date, but in practice this doesn’t work so well. Payroll and CIS returns have to be prepared to 5 April, whereas Vat is prepared to a month or quarter end. If a business’s accounting year end is 5 April or 31 March, it won’t coincide with both the payroll and Vat periods.

So why don’t we just change everything to a calendar year basis – i.e. year ending 31 December each year. The USA, France, Germany, Spain, Ireland – they all use the 31 December – why don’t we? The office of tax simplification is certainly considering how this could be achieved.

But there are other complications

Whilst moving the tax year end to 31 December may seem intuitive, it doesn’t address a different problem. Any self-employed business or partnership can choose whatever accounting date it likes when preparing accounts for the business. So, it may prepare accounts to 31 March or 31 December, or perhaps 30 April or any other date in between. We have inherited a business with a 5 November year end because the business started trading on 6 November initially, and the first set of accounts were prepared for a 12-month period, which then set the accounting date.

Currently a business pays tax based on the profits arising in the accounting period which ends in the tax year, with some weird and wonderful rules at the beginning and cessation of the trade to avoid taxing the same profits twice. It is possible to move an accounting date, but the calculations can get tricky, and more tax can be due in the year of transition. Details of the overlap relief (those profits which would otherwise be taxed twice and can be offset on a change of accounting date) may not be easily accessible, or may now be of little value as they are not index linked.

Because of the move to taxpayers supplying information to HMRC quarterly under MTD, it would be helpful (for HMRC) if every business worked to the same accounting dates – i.e., paid tax on the profits or income arising in the tax year. The government believes that this would make it easier for taxpayers to supply the data, and have suggested that reforms will be implemented as early as 2023 to make this happen:

Which comes first – the chicken or the egg?

If a business is required to report profits in line with the tax year, it is likely that most will want to change their year-end to coincide with the tax year rather than having to pro-rata profits from two accounting periods. Businesses with e.g. a December year end will struggle to know the profits arising in the year to 31 December 2024, by 31 January 2025, the filing deadline for 2023/24 tax returns, although they will have to include 3/12ths of the profits from that December year on their 2023/24 returns.

But will a business have to change its year end to 31 March by 2023, only then to have a 31 December calendar tax year when that change is introduced at a later date? Will they then have to consider a change again, back to what they were using before? It is essential that these changes are co-ordinated.

Seek and take advice

The timings of these changes can have a huge impact on the taxpayer’s liability for each tax year, especially during a pandemic where profits and losses are not necessarily consistent year on year. The purchase of capital assets can always impact the tax due, but advice on when those purchases should be made will be even more fundamental in the face of the proposed changes. Some have argued that this is not the right time to make such a big change in the way our tax system works, but the recent announcements would imply that the government is pushing ahead regardless.