Financial Focus On…Bad Habits

by Robin Beadle

The late American author H H “Zig” Ziglar said, “All habits start slowly and

gradually and before you know you have the habit, the habit has you.”  Whether

by habit or lethargy, many businesses have chosen one accounting date (quite

often the end of the tax year) and then stick almost religiously to it

throughout the life of the business.

However, for the self-employed or those in partnership, the choice of the

annual accounting date can have profound effects ranging from specifying into

which tax year a particularly good or bad year falls (and thus the amount and

timing of the tax due), to the allowances available for new capital purchases,

to the amount of time you have between the end of the accounting period and the

time your Self-Assessment Tax Returns have to be filed.  However, you are not

required to keep to the same accounting date throughout the life of the

business.  In fact, reviewing the accounting date every few years can be a

particularly healthy thing to do, especially with the curtailing of some tax

reliefs in recent years and the introduction of “Making Tax Digital” (see

below).

Starting simply, if a sole trader makes his annual accounts to, say, 31 March

each year, he will have 10 months in which to prepare his accounts before any

tax is due.  However, a trader with a year-end of 30 April has 21 months to do

the same task.  More importantly, for the trader with a 31 March year-end, if he

has a particularly good year he will have almost no time before 5th April to

consider the making of additional pension contributions (which can no longer be

carried back).  Contrast this with the individual with a year-end of 30 April,

who has 11 months before the end of the tax year in which to decide whether to

invest further.

So how easy is it to change your accounting year?  Actually pretty

straight-forward – but it should not be undertaken too often and certainly not

without good reason.  To change an accounting year-end, largely all that is

required is to notify HMRC of the change (which can be undertaken on the annual

Tax Return) and draw up the accounts to the new date.  There are some additional

rules of course and your new accounting period from old to new should not exceed

18 months, you should not have changed accounting date within the previous 5

years without a very good commercial reason (which obtaining a tax benefit

isn’t) and changes of accounting date have no effect when just starting or

ceasing a business.

When you change accounting date, the new date forms the end of a notional

period of 12 months.  Depending on which way you are moving your accounting date

(towards or away from 5th April), this can cause some profits to be assessed

twice so you ideally want to avoid a very good year when doing this.  The

double-assessment gives rise to “Overlap Relief” which is then carried forward

and is used either when you change date in the opposite direction or when the

business ends.  There are also special rules to restrict loss relief to that

actually incurred and critically you need to be careful if you then end up with

two accounting periods (old and new) ending in the same tax year.

But if we return to our 31 March trader, if he has a poor year to 31 March

2017 and then chooses to switch to a 30 June year end (away from 5th April),

drawing up a short period of only 3 months for the change, the notional 12 month

period for 2017/18 as required by HMRC repeats 9 months of the poor trading thus

depressing his income tax and NIC liabilities for longer.

Apart from delaying his income tax and NIC liabilities, such an approach

would also be useful if he were planning to have a one-off source of income

separate to the business.  This might include a one-off lump-sum pension payment

from a deferred State Pension entitlement, a bonus from an employment or the

encashment of a Life Assurance bond which, if added to a good trading year,

could push him into the next tax bracket, trigger a reclaim of Child Benefit or

even cost his personal allowances

Conversely, changing your Accounting Date towards 5th April instead of away

from the end of the tax year, you could accelerate loss relief to be offset

against other income or capital gains, utilise Overlap relief or obtain relief

for asset purchases sooner.

To add to complications is the introduction of the new “Making Tax Digital”

(MTD) which will be discussed in greater depth in a future article.  These new

rules from HMRC broadly require businesses and landlords who have turnover above

£10,000 to make quarterly returns of 3-monthly income based on your year-end. 

For example, if you have a 30 April year-end, your Returns will be 30 July,

October, January and April.  MTD will come into force from 6 April 2018 (under

current plans as at the time of writing) with a staggered start and will apply

to the first annual accounting year that starts after this date.  Therefore,

someone accounting with a 5 April year-end (which starts on 6 April 2018) will

have to join into MTD nearly a whole year before someone who accounts to 31

March annually (which starts on 1 April 2019). 

MTD adds further complications to those with multiple source income – for

example those with both self-employment and rental income.  Landlords are

currently unable to change from a 5 April year end as they are assessed on a tax

year.  Therefore if you are also self-employed and account to 28 February (for

example), under current rules, you will presented with the mind-blowing

bureaucracy of having to make two sets of quarterly returns under MTD – one set

for your business on the 28 February, May, August and November and another set

for your rental income on 5 April, July, October and January (plus of course

your annual accounts and Tax Returns).  In this example, as you cannot move your

rental accounts’ year-end, it would make sense to reduce your MTD compliance by

moving your business year-end to either 5 April or to another one of the

“landlord” quarterly accounting dates that will already be required and thus

remove the obligation to file 8 quarterly returns rather than 4.  (Alternative

suggestions might also include considering the merits of moving the rental

income into a spouse’s name – especially if the rental income by itself is less

than £10,000).  Again, more on this later

MTD is therefore an opportunity to tidy your year-end, not least to either

reduce your administration by making your VAT quarters line up with your MTD

ones (if VAT registered) or try to avoid an MTD quarter falling during a

particularly bad annual period (such as harvest or other annual personal or

business events) or to reduce the double-reporting requirements.  However,

purely changing your year-end to delay the introduction of MTD should not be

undertaken lightly.  In order to delay a one-off introduction of additional HMRC

administration by 11 months you may trigger an increase in tax due (by having a

good year assessed twice), or using your “once every five years” opportunity. 

There is no “one-size fits all” advice with either changing your year-end or the

introduction of MTD (again see a future article on this matter) and professional

advice is strongly recommended

Whilst the mathematics involved in determining the benefits of changing your

annual accounting date can be tortuous and complicated, by considering breaking

your regular accounting habit, there could be substantial benefits to be had. 

Just don’t rush into doing it.

Author

Robin Beadle

View Biography