A new Tax Year End? It’s a no from me…
With the government’s independent advisers pitching to move the end of the tax year, Neil MacGillivray, Head of Technical Support at James Hay, considers how we wound up with the current tax year end date and challenges the new proposal.
The Office of Tax Simplification (OTS) has announced that it’s considering the possibility of moving the end of the tax year from 5 April to either 31 December or 31 March. It begs the question, why bother? After all, depending on who’s interpretation you believe, it’s worked well enough for at least 200 years.
Many countries use the end of the calendar year or the last day of a particular month to end their tax year, so why did the UK choose 5 April? And after all this time, why change it now?
To answer the first part, you must go back to 1582. At that time, Pope Gregory XIII considered the Julian calendar – which had been in situ since 45 BC and named after Julius Caesar – as being inaccurate. The solar calendar, which is based on the actual time taken for the earth to travel around the sun, differed from the Julian calendar by around 11 minutes a year. This meant that over a period of 400 years the Julian calendar accrued around three days more than the solar calendar.
For that reason, Gregory decided to introduce, with a hint of modesty, the Gregorian calendar. The Julian calendar also added a leap year every four years, but a slight modification was introduced under the Gregorian calendar. A centennial year would not be a leap year unless it was divisible by 400, correcting an anomaly against the actual time taken for the earth’s rotation.
The Gregorian calendar was quickly adopted by most of Europe, but Britain lagged behind, only adopting the new calendar in 1752. By then an 11-day difference had amassed between the Julian and Gregorian calendars.
To align with the new calendar there was a jump from 2 September straight to 14 September. Overnight, people lost 11 days as well as the corresponding income due to the shortened month. The ever-prudent Treasury, to ensure no tax revenue was lost, decided that the tax year should still be the full 365 days and therefore with the then legal New Year’s day being 25 March (though not in Scotland), it was extended to 4 April 1753. Overall, this didn’t go down well with the public and there were supposedly riots, with people demanding the return of their 11 stolen days.
Ah, I hear you ask, but that’s not 5 April – well apparently there are two opinions as to why this is the case. The first, which is the most common, is that 1800 would have been a leap year under the Julian calendar but not under the new Gregorian calendar. Again, the ever-prudent Treasury decided to treat it as a leap year in order to gain an extra day’s revenue but to retain the Gregorian calendar they had to move the tax year by a further day to 5 April. It’s suggested this is something of an urban myth, with the perceived wisdom being that the original 11 days was not applied from 25 March 1752 but from the day after. Although, for historical religious reasons, the legal year began on 25 March, so the tax year may actually have begun a day later. Whichever is supposedly correct, we’ve retained 5 April ever since.
5 April is anomalous given the UK financial year end for government accounting, and the date to which corporation tax rates apply, is 31 March. This is also the most popular company accounting year end date, with 31 December being the second, and I’ve already mentioned other countries tendency to end their tax year at a month end. It’s apparent using a date based on a historic precedent rather that the practicalities of modern business needs to be given some consideration, and it’s perhaps worth mentioning that Ireland took the step in 2002, by moving its tax year end from 5 April to 31 December.
If a change was made, then the following tax year will be shorter. If it were to end on 31 March, which is probably the most likely choice, the transitional year would be shortened by five days and run from 6 April to the following 31 March. If it was moved to 31 December, the transitional year would be shortened by three months and five days and run from 6 April to the following 31 December.
I doubt the nation will take to the streets in protest if it does go ahead, but I still have to ask the question, why change it now? Plus, with all that is happening in the world at the moment it seems a strange time to be considering changing this. So, for these two reasons alone, it gets the thumbs down from me.
This blog first appeared on Professional Adviser