For the self-employed or those in partnership, the choice of the annual accounting date can have profound effects. The effect of a differing annual accounting date could mean that two otherwise identical businesses with the same annual profits may end up with substantially different liabilities if their annual accounting dates were a mere 25 days apart.
If you consider that one business draws its accounts to 5 April, whilst the second takes 30 April as its year-end, these dates fall into different tax years with possibly differing tax rates, allowances, NIC charges and potentially legislation. Additionally, for unincorporated businesses with an accounting date other than 5th April, you may also have something called “Overlap Profits” which is the result of opening year profits having been assessed to tax twice or, if the business has been going long enough, on the conversion to the current basis of taxation in 1996/97. Overlap Relief is a credit that is carried forward until either the business ceases or it changes its accounting date. Unfortunately, Overlap Relief is fixed and not index-linked to inflation and will therefore over time be reduced in value in real terms.
Whilst a choice of 30 April annually for your accounts gives the greatest amount of time between earning the money and paying tax on it, there is a sting in the tail for when a business ceases. For any given tax year, you are broadly assessed on the profits for the accounting periods that end in that year. Therefore, if you draw your accounts to 30 April annually and then cease trading on 31st March there are two accounting periods that end in the same tax year giving potentially 23 months of profit falling to be taxed at the same time. Whilst upon cessation any Overlap Relief will be used up, this may be woefully insufficient to offset this problem.
In the above example you could either look to continue to trade for another month (in order to finish in the subsequent tax year) or look to plan ahead in order to change your accounting date a couple of years before you actually do cease trading
Changing the accounting date can bring the Overlap Relief forward and is something that businesses should review every few years or so. It is particularly useful where the profits in the year of change are significantly different from the usual level, particularly if there has been a sudden drop in your profitability. As HMRC need not know that a non-corporate business has changed its accounting date until the Tax Return(s) are submitted, provided that the business keeps its books and records up to date there should be abundant time to allow both the business and accountant to consider whether a change is advisable.
There are of course factors why you may have the ideal accounting date for your business. For example, your business may be particularly seasonal and shifting the time when the accounts need to be prepared or a stock take made to another part of the year may not be practical. Alternatively, you may wish to change your accounting date to align with other similar business interests. As usual, tax is not the only factor.
Due to the very long-winded calculations involved it is impossible to give you concise, meaningful examples of the potential savings to be had. Suffice it to say that the computations and permutations are complex, the principle simple and the savings potentially immense.
Whilst a change of accounting date is a perfectly normal thing to consider as far as HMRC is concerned (who even give guidance on how to do it on their website), you do still need to ensure that the correct procedures are followed as Rupert Grint (Ron Weasley in Harry Potter) found to his cost when his change of accounting date was rejected by HMRC at a cost of over £1m.
For further information on any of the above points or to discuss your affairs generally, please contact Robin Beadle.