Why does the UK’s tax year start on April 6? Surely April 1 would be much more convenient?
Even better, why doesn’t the tax year follow the calendar year and start on January 1? Unfortunately, there is little about tax that is intuitive and much that is steeped in the past, and the calendar it follows is no exception.
But that shouldn’t be permanently bound by our fiscal history. As with so many things, the pandemic gives us a chance to look again — and change what we don’t like.
The tax year which runs from April 6 to April 5 should be replaced by one starting on the first day of the month and most sensibly by one starting on January 1.
Individuals and businesses transact across borders all the time but it is unnecessarily cumbersome to have to deal with nonaligned tax jurisdictions. Added complexity means more time, more mistakes and generally increased compliance cost. The US, France, Germany, Spain, Ireland and even Jersey (a British dependency) all use calendar years.
Our April 5 year-end originates from when people in England were required to pay rents to their landlords quarterly on what were, and still are, known as quarter days; March 25, June 24, September 29 and December 25. The first in the year, known as Lady Day, came to be regarded as the start of the financial year.
In 1582, Pope Gregory XIII ordered that the old Julian calendar introduced by Julius Caesar should be replaced by the Gregorian calendar we use today. The old calendar, although reasonably accurate, was slightly too short and had slipped over the years. Much of Europe moved across immediately, but Britain took a little longer — 170 years in fact. By then, our calendar was out of step by 11 days and so it was that after the taxes had been paid on March 25 1752, 11 days were removed from the calendar and the new tax year started on April 5 1752.
This caused something of a ruckus at the time and I imagine businesses in 2021 would still feel cheated if, on paying a year’s worth of business rates, they were told it would only cover 354 days.
It took a further 20 years to remove one more day (to accommodate the year 1800 not being a leap year) for the start of the new tax year to move to April 6, the date we use today.
The UK does however have a history of simplification and embracing radical change. In 1971, the UK converted from our old system of currency, weights and measures to units related by powers of 10. As we approach the 50th anniversary of decimalisation, many will recall the challenge of moving from LSD (pounds, shillings, and pence) to pounds and pence, but few would want to go back.
While the April 5 story may be interesting to students of taxation, it is not the bedrock for simplicity and does not give the UK the right platform for the modern digital tax system. I am not aware that any other nation with serious financial ambitions uses such an odd date. Ireland used to, but moved to a December 31 year-end in 2002 when it joined the euro.
No one could have anticipated the financial shock we suffered in the past year. The cost to our economy has been immense, but perhaps we might take the opportunity to make some sensible changes as we move forward. Tax is complicated: we don’t need to start each new tax year in the middle of a calendar year and in the middle of a month.
The sensible alternatives are April 1 and January 1. While ending the tax year on March 31 would present a smaller dent in our public finances in the year of change, it would fail to deliver the benefit of international comparability and competitiveness, which would be achieved by December 31. The loss of tax revenue in that year would only be a timing difference, although given the government’s accounting system the numbers could appear large.
Ironically, the government is actually ahead of itself. Last year, it launched its 10-year strategy, “Building a trusted, modern tax administration system”, a major part of which requires businesses and landlords to keep accounting records digitally and report income details quarterly.
Quarterly reporting is already a requirement for VAT and these returns must be submitted to calendar month ends, for example quarters ended June 30, September 30, December 31 and March 31.
By 2023, income taxpayers will be reporting quarterly too. Buy-to-let landlords and householders renting out spare rooms who must use the tax year to report their property income will be sending summaries to HM Revenue & Customs for quarters ended on the fifth of July, October, January and April.
Those running businesses will also be reporting their profits quarterly, but have more flexibility to choose their reporting dates.
The inconsistencies in these dates will need to be ironed out or we risk confusing people. This sounds simple but such changes to our tax code are never straightforward.
Digital filing and online communication are just the first steps. We also need a tax system ready to align with the rest of the world as business itself moves online.
I suggest step one is to start the tax year on a date that the average UK citizen would regard as the start of the year, namely New Year’s Day.
Anita Monteith is a senior policy adviser at the Institute of Chartered Accountants in England and Wales