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.
