17 Mar Why doesn’t the UK tax year start on 1 January?
There is little about tax that is intuitive and modern, including the date our tax year starts - 6 April. We have our ancestors to thank for that. Our tax year dates originate from when people in England were required to pay rent to their landlords quarterly on what are still known as quarter days; 25 March, 24 June, 29 September, and 25 December. The first in the year, 25 March, came to be recognised as the start of the financial year, and originally kicked off the whole annual calendar.
In 1582, Pope Gregory XIII ordered a change from the Julian calendar (named after Julius Caesar) to the Gregorian calendar (you can probably guess where that name came from). The Gregorian calendar noted it actually only takes 365.2422 days for the Earth to orbit the Sun, instead of the 365.25 days that the Julian calendar followed. While the new Gregorian calendar was almost immediately followed by nations under Catholic control, England, as a Protestant country at the time, did not adopt the calendar until much a later – 170 years in fact.
The old Julian calendar that England was still following was slower than its replacement and over the years this added up. It meant that England fell behind the majority of the world at a time when its growing empire needed it to be in sync with its trading partners. The first attempt to catch up came in 1751 when New Year’s Day became 1 January, meaning England’s calendar for that year was just 282 days, from 25 March to 31 December. Then, to allow for the extra 11 days, in 1752 the English calendar jumped from 2 September to 14 September overnight. Understandably this did not sit well with everyone, and people felt somewhat cheated that despite paying a year’s worth of business rates, they were only actually covering 354 days, so it was decided that the end of the tax year be shifted 11 days too.
However, the Julian calendar wasn’t quite ready to give up its hold on English life. One of its unique characteristics was to mark the first year of every new century as a leap year, instead of the Gregorian approach to only have the extra day when the year (including the first of each century) was divisible by four. Therefore, in 1800, the tax year was moved by another day in recognition of the skipped leap year, making the start of the new tax year 6 April; the date we use today.
While the Julian Calendar vs. Gregorian Calendar story may be an interesting piece of history, is does not give the UK the correct platform for the modern digital tax system that a lot of the world are already embracing. Many other countries, including the United States, France, Spain, Germany and even British dependencies like Jersey, use the calendar year as their tax year too. Individuals and businesses transact between countries all the time and it is unnecessarily complicated to have to deal with nonaligned tax jurisdictions.
The UK has a history of simplification and embracing change, as demonstrated by the forthcoming 50th anniversary of decimalisation. But as a nation with serious financial ambition, we seem to be stuck in the past when it comes to tax. With the financial loss and shock the UK have suffered this past year at the hands of the dreaded C-word, the loss to our economy has been immense. However, with this loss comes the opportunity for change.
While ending the tax year on a simpler date like 31 March would create a smaller dent in our public finances, it would fail to deliver the benefit of international comparability and competitiveness which would be achieved by ending the tax year at the same time as the calendar year on 31 December. Although the loss of tax revenue in that year would appear large, it would only be a timing difference.
In some ways, the government is ahead of itself. For example, last year it launched its 10-year strategy to build a trusted, modern tax administration system. A major part of this plan requires businesses and landlords to keep accounting records digitally and report income details quarterly, something that is already a requirement for VAT. These returns must be submitted to quarters ending 30 June, 30 September, 31 December, and 31 March.
By 2023, income taxpayers will be reporting quarterly too. Buy-to-let landlords and householders renting out rooms who must use the tax year to report their property income will be sending summaries to HM Revenue & Customs for quarters ending 5 July, October, January, and April. The inconsistencies in all these dates risk confusing people and leave room for errors to be made. Digital filing and online communication are just the first steps in modernising our tax system to be one that is ready to align with the rest of the world.