Tax year-end review

25 August 2021

The CIPP policy and research team discuss some of the potential implications were the end of the UK tax year to be moved as outlined in a recent scoping paper

To some it’s just another day in the year, but to the payroll profession 5 April is a momentous date as it marks tax year end – but could that soon change? The Office of Tax Simplification (OTS) has announced a review that could see this date move to 31 March or even to 31 December (http://ow.ly/uXBC30rL4Pc).

Whilst some may wish to cling onto the centuries-old, traditional end date, there are legitimate arguments to pursue the move. Globalisation means many businesses operate internationally, and the lack of alignment across borders increases complexity for global companies.

Given the economic implications of the pandemic, the Treasury will inevitably want to take a cautious approach to ensure that any change does not have a detrimental impact on economic recovery. So, any change to the tax year will take considerable planning to be successful.

Income tax and NICs

A move to a new tax year would result in either a 270-day transition year (to 31 December) or a 360-day transition year (to 31 March).

An obvious consideration of this shortened tax year will be the effect on the annual thresholds that attach themselves to calculations for income tax and National Insurance contributions (NICs). The latter thresholds are usually applied on a weekly or monthly basis and will need to be adjusted to reflect the shortened year. Would government opt to amend the thresholds applied every month to reflect the transition, or would employers be required to adjust a single pay period in a different way?

Thresholds, however, are only part of the story.

The income tax personal allowance will need to be adjusted to reflect the shorter transition year year and to avoid providing individuals with too much tax relief. Tax codes can be made up of multiple allowances; for example, the working from home allowance, and the marriage transfer allowance. All the elements that can impact the overall tax calculation must be reviewed and prorated to prepare for a shortened tax year. Annual allowances are not the only consideration.

Tax codes can often be amended to recoup monies owed from earlier or current tax years. During the transition tax year, HM Revenue & Customs will need to consider how these recoveries can be accurately collected, and whether recovery should take place over more than one year – particularly if the move takes the UK to a tax calendar year.

Legislation underpins many elements here, and government must also work to implement amendments to these so as to deliver a new tax year effectively.

Statutory payments

Typically, every April features changes (usually increases) to a range of statutory payments, including sick pay, maternity pay, paternity pay, and a week’s pay for various purposes, such as redundancy pay. The exact date at which an increase might apply varies: it can often be from the first Sunday in April (regardless of whether this is before or after 5/6 April), but for statutory sick pay and a week’s pay the changes normally occur on 6 April.

Though increases to statutory payments etc in April are controlled by social security and employment law, they are related to the start of the UK fiscal year. So, a change to 31 March would not create a significant change to timings but moving to 31 December might well do so.

Budgets and announcements

Although this year saw Budget announcements in March, many if not all of them would usually be expected in the autumn preceding the new tax year, thereby giving payroll teams and payroll software providers the chance to prepare and react to the proposed changes.

Whilst a tax year end change to 31 March would not warrant changes to the existing Budget schedule, a change to 31 December would mean the government having to adjust their schedules quite significantly. It could mean that the transition year would feature two Budget announcements within six to nine months of each other.

Software implications

Payroll software is built to deliver accurate and timely results based on the existing tax year. Adapting to a new tax year, including building a solution to manage the transition year will be a complex process for developers. Standard tax tables built into solutions will need to be redesigned, whilst ensuring it is possible to retain the legacy data. Those tables will often link through to other modules and pay elements and be used as the basis for many calculations. These links will need to be unpicked and reassigned to accommodate these changes. This development will come at a cost, and it is inevitable that consumers will need to foot the bill – either as a one-off payment or in the form of an overall price increase.

Benefits in kind

The calculations for benefits in kind are well established, but a change to the UK tax year would result in a year that is less than 365 days. Consequently, the calculations will need to be adjusted to reflect this reduction, and software will need to be capable of supporting these calculations during the transition year.

Dates and schedules

The proposed changes will result both in a change to the tax year end date, but also to the tax month end date. The potential consequences here are significant. Currently, PAYE (pay as you earn) payments are due by the 22nd proceeding the end of the tax month (or 19 April, if paying by cheque). Will the seventeen-day gap be maintained, bringing the payment date forward to the 17th of the month, or will government maintain existing deadlines and increase the time available to payroll teams to reconcile and pay amounts due?

Other well established payroll deadlines would also need to be reviewed – P60 certificates distribution, P11D and P11D(b) returns deadlines, and PAYE settlement agreements too. A move to 31 March would make it viable to retain existing dates, but a move to 31 December would lead to an inevitable change in approach for all these key payroll documents, returns and payments.

All the above will have an impact on cash flow and payroll schedules. Schedules are often well established, and where vast numbers of payrolls and pay frequencies are involved can be incredibly complex. Recreating payroll schedules in the simplest of environments will be a challenge, recreating them in these complex environments will feel almost impossible for many payroll teams already tackling difficult business demands.

So, what next?

Payroll professionals constantly adapt and manage change in their roles, and a change in tax year would not be an impossible task. Before any change is made, however, the government must ensure that the benefit outweighs the cost of implementation.

There are many items to consider in planning this change and government must ensure they are adequately prepared to facilitate the smoothest possible transition.