Iain Rankin examines the rationale behind the proposed change of tax year end date, and the forthcoming abolition of the basis period rules for unincorporated businesses.
In Budget 2020, as part of the transition to a digital tax system, the UK government set out its proposals on the further modernisation of the UK tax system. A report by the Office of Tax Simplification proposed a change of tax year end and covered two specific dates, 31 March and 31 December.
Fiscal year end
A change in the tax year from 5 April to 31 March would have minimal to no effect on business. In practice, it is accepted that both dates are interchangeable. HMRC’s basis period reform consultation found that 93% of sole traders and 67% of partnerships already use a 31 March year end. Companies using year ends other than 31 March tend to be larger businesses within specific sectors.
Changing the tax year from 5 April to 31 March would thus remove a historical anachronism but would affect only income and gains based on the receipt or the transaction date.
The second proposal, moving the year end to 31 December, would result in a more meaningful shortening of the tax year by three months and five days. A tax year end date of 31 December is relatively common among the UK’s main international trading partners; Ireland moved its government accounting and tax year end from 5 April to 31 December in 2002.
A change to 31 December would thus create clear advantages for individuals and companies that deal with or are based in multiple jurisdictions. Problems can occur when reporting income and gains for a fiscal year to 5 April, because the standard reports are not drawn up on a calendar year basis. With quarterly reporting, this may change as the need to report the income on a quarterly basis becomes the norm.
The brunt of any change to 31 December would perhaps be borne more by smaller entities during the transition year. Businesses not currently using 31 December would see annual profits artificially inflated or deflated, thus providing an inaccurate view of a firm’s trading health.
Basis periods
The forthcoming reform of basis periods will create an additional compliance and, potentially, tax burden for businesses. The legislation (to be enacted in Finance Act 2022) will end the calculation and use of overlap.
Firms will be required to calculate profits to the usual accounting date then add a second calculation, apportioning profit to meet the tax dates for the transition year, less overlap. Overlap relief will thus be, in many cases, less than the additional profit brought into charge, particularly hitting businesses who have been trading for a number of years.
Where there is an additional charge, there will be a facility for the additional profit to be spread over five years.
For 2024/25 and subsequent tax years, income should be apportioned to the period in which it arises using the same methodology currently used for property income.
Finally, there will be a transition period of just one year (i.e., 2023/24). It is this transition that will most likely cause issues for those not using a 31 March year end.
Conclusion
Currently, making tax digital (MTD) focuses on a predominantly 31 March year end. A change to a 31 December tax year end could follow after companies are brought into MTD, and quarterly reporting is the norm. With income being reported quarterly on an arising basis and taxed accordingly, HMRC anticipates that year end adjustments will be minor and will be reflected in smaller balancing payments. This would then, as long suspected, open the doors to quarterly tax payments.
