The UK tax system is notorious for its complexity. Every year seems to get worse, with a fresh Finance Act adding a few hundred more pages of legislation – this year’s Act ran to 417 pages. One of the more bizarre aspects of our tax system is the tax year 6 April starting date for individuals, rather than a more logical date such as 1 January (chosen by many countries) or even 1 April.
Blame history
That 6 April date has its roots in England’s distant past. It began life as 25 March (Lady Day), which was New Year’s Day in England from the middle of the 12th century. The introduction of the Gregorian calendar in 1752 and an anomalous leap year in 1800 resulted in an extra 12 days being added, to arrive at the current 6 April date. Both additions were driven by Governments anxious to keep 365 days of revenue in one tax year.
The Office of Tax Simplification reviews a revision
In June, the Office of Tax Simplification (OTS) announced that it would be undertaking ‘a high-level exploration and analysis of the benefits, costs and wider implications of a change in the date of the end of the UK tax year for individuals’. Somewhat disappointingly, the OTS said its focus would be on moving the end of the tax year to 31 March, which would align it with the Government’s own financial year and the corporation tax year.
However, the OTS did also promise to ‘outline the main additional broader issues’ of a move to align the tax year with the calendar year. Interestingly, just such a change was undertaken by Ireland in 2002, when it had a shortened tax year running from 6 April 2002 to 31 December 2002.
When the OTS published its review on 15 September, unsurprisingly, it confirmed that a clear majority of those responding thought that the UK should adopt a different year end. Alas, their wish will not be granted, at least in the short term. The OTS recommended that any change should wait until after major HMRC projects have been completed, such as the Single Customer Account, and Making Tax Digital (MTD) for income tax.
HMRC has its own ideas
In the month after the OTS’s June review announcement, HMRC weighed in with a consultation paper on another aspect of the tax calendar; the taxation of the self-employed, including partnerships. HMRC’s proposals revolved around that key 6 April date and made no mention of the OTS work.
Currently, the ‘basis year’ approach means that the self-employed generally pay tax on the profits earned in their trading year ending in the tax year. The choice of trading year is down to the individual or partnership. So, for example, if you have a trading year that runs from 1 May to the following 30 April, in the 2021/22 tax year, you will be taxed on the profits earned in your trading year 1 May 2020 to 30 April 2021.
HMRC wants to change the basis year method to mean that the self employed are taxed on what they earn during a tax year. The consultation paper says this is necessary as part of its MTD for income tax programme and would take effect from 6 April 2023. Such a reform would have two important consequences:
From 2023/24 onwards, to arrive at profit figures for the tax return, it would be necessary to pro-rata profits from two trading years. Taking that 30 April year end again, in 2023/24, tax would be calculated by apportioning profits in the trading years to 30 April 2023 (25 days’ worth) and to 30 April 2024 (341 days’ worth). Anyone with a trading period ending late in the tax year, e.g. 31 December, could be forced to give an estimate if their accounts are not ready by the 31 January return filling date. An adjustment would then need to be made once accurate figures became available.
2022/23 – next tax year – would be a transitional year in which all profits to 5 April 2023 not previously taxed would be taken into account. The result could be nearly two years’ profits taxable in a single tax year. For that 30 April year end, in 2022/23 the taxable profits would be from 1 May 2021 to 5 April 2023 – over 23 months’ worth – again calculated on an apportionment basis across two sets of accounts. HMRC acknowledges the impact this would have on personal tax bills and suggests ‘excess profits’ could be spread over five tax years.
The HMRC proposals have received predictably wide criticism, with many tax professionals saying they are being forced through far too quickly – even the consultation period was halved to six weeks, most of which fell in August. Others have suggested the idea was just another example of the Treasury’s familiar money-raising ruse of accelerating tax payments. The Treasury has since responded, saying that the Government will now delay the MTD for income tax programme and any basis year reform by a year.
ACTION
If you have the sense that any real reduction in the complexity of the UK tax system is as distant as ever, you are probably correct. With Government borrowing at record levels, any ‘simplification’ that does eventually emerge from the current proposals is likely to hide higher and/or faster tax payments. Guidance on tax planning will continue to be vital.
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