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Tuesday, 23rd April 2024
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Should the tax year end change? Back  
The Minister has announced a change of tax year end from 6 April to 31 December. Are there any benefits and are they worth the bother?
Rational or merely neat?
The tax year end was last changed in 1752 on the occasion when Great Britain and Ireland moved from the Julian calendar to the Gregorian calendar. That involved cancelling eleven days on the then existing calendar. Rather than sacrifice the revenue for those days the government of the day moved the tax year end forward. It is now proposed to bite the bullet on having a short tax year in the interests of moving the tax year end to 31 December.

The government press release described this as “rational”. The fifth of April was a strange date to choose on which to end the tax year, but no date makes any greater sense than another date. The thirty-first of December is a year end for other purposes that we are accustomed to. Its choice as a tax year end has a spurious air of neatness about it.

One argument that can be made in favour of 31 December that is independent of this spurious neatness is that the government’s expenditure planning is done on a December year end basis. It does make sense to plan your expenditure and your revenue on the same basis. In practice however large parts of increased expenditure are not at present brought into effect until after 5 April in each year so that the true expenditure year and revenue year are not that far out of line.

It has been suggested that bringing forward to January (from typically May) the implementation of many large expenditure decisions such as social welfare increases provides an advantage for those dependent on Social Welfare. But it is a once off advantage. Once it has been done once, a full 12 months will follow before further increases will be due. The most can be said is that the arguments in favour of a change are not decisive.

Costs
Change will involve disruption and costs. We are told that the change is being made now so that the software changes which employers will have to make to their PAYE systems can be done in conjunction with the Euro changes. It may be convenient to do them at the same time as the Euro changes, but it would be so much more convenient not to have to do them at all.

Other priorities
The most urgent need for change lies in the manner in which we process the annual Finance Act, rather than in the choice of date to which it should relate for income tax purposes.

At present highly complex tax legislation receives only a few days debate in a committee before being passed into law. The quality of democracy and of the legislation suffers from this hasty approach. A reform of this shoddy method of making tax law would have required separating the Finance Bill into two separate Bills, - one very short Bill to implement changes of rates, and a second Bill dealing with technical matters and fundamental changes.

The Bill relating to tax rates is constitutionally required to be enacted within four months of the financial resolutions on Budget Day. It is this deadline which is the basis for the rushed debate of tax legislation. But there is no reason to have that deadline applied to most of the technical legislation. If that were divorced from the Bill relating to tax rates, it would be freed from the tight deadline for enactment.

This, rather than the change of year end, might have been a more appropriate reform to which to give priority.

Filing and payment date changes
At the same time as the change in the tax year end, changes are proposed for the dates on which tax returns have to be filed by individuals subject to self assessment, and on which tax has to be paid by them. Because these changes were announced in the context of the change of tax year end, it might be thought that they are a necessary part of that change. In fact they are not. It would be quite possible to change the tax year end without making any changes to the tax payment and filing dates. Those additional changes are a quite separate matter.

Preliminary tax in 2002 will have to be paid on 30 September, rather than, as under present law, on 1 November 2002. That brings the payment date forward by a month.

At present an interval of 10 months from the end of the year of assessment is allowed for the filing of a tax return. Under the new system that interval is being reduced to six months.

Under the existing system payment of the final balance of tax is due 13 months after the end of the year of assessment. Under the new system that is shortened to a date of nine months from the end of the year of assessment.

The bringing forward to 30 June following the year of assessment of the filing date (compared to 31 January at present) will almost certainly force many individuals who prepare trading accounts to dates close to 31 December to change their year end. Many companies with sophisticated accounting systems and accounting staff find it difficult to have finalised tax returns within six months of the end of their accounting periods. It is to be expected that individuals will be less well organised and will find this interval too short. A change of accounts year end by an individual carrying on a trade etc can have consequences for the computation of his tax.

Voluminous legislation
The government have identified a host of changes to legislation that will be necessary to cater for the fact that the initial “tax year” on the new basis will be for a period of approximately nine months, rather than one of 12 months. It promises the prospect of a bumper Finance Act next year to cope with these changes.

The list so far published by the government is not comprehensive. There are many problems not addressed eg foreign earnings deduction, where the bulk of foreign travel for work purposes occurs in the first three months of the calendar year. In such a case in the nine months ended 31 December 2002, which will be the first of the new “tax years” an individual may lose out on his foreign earnings deduction in relation to the income of that period. A similar problem can arise where an individual pays interest, relieved as a charge, and the payment arises in January, thus falling outside the first of the new tax years.

Changing the tax year end can surely not be a priority of fiscal policy. Is it right to divert so much legislative time, software programmers time, and time in the Civil Service and tax advisory profession to this? Could we not wait until we all have nothing better to do?

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