Chartered certified accountant Raphael Coman of Coman & Co provides advice about choosing an accounting year-end date for your business
The choice of date for your accounting year-end is entirely up to you as a business owner, but there are many factors to consider.
The date you choose will affect when you pay tax on your profits. While aligning your accounting date with the tax year may be the simplest option, there are implications for a growing business that you should consider.
- For incorporated companies, an accounting date will determine the payment date of tax. The business should have sufficient cash to pay the tax liability when it becomes due.
- For an unincorporated business, profits for a tax year are decided at the accounting date in that tax year.
- The earlier in the tax year you select as your accounting year-end, the longer you will have to pay tax on your profits. As a result:
- Where your profits are increasing, your tax bill will rise more slowly.
- Where your profits are falling, it will take longer for any reduction in your tax bill to take effect. However, if your profits are falling you can change your accounting date to later in the year.
- Although there is a cash flow advantage to having an earlier year-end, you should make a provision for the higher liability when the business ceases.
- Using an accounting year-end of 5 April or 31 March is the simplest way to apply the current year basis of assessment.
- The later in the tax year the accounting date falls, the shorter the period in which to make the related tax payment, and therefore the greater the risk of incurring a penalty for late payment.
- Over the life of your business, you will only be taxed once on your profits. But some of your profits will have been taxed twice during the life of your business, unless your accounting date is 31 March or 5 April. You will therefore get tax relief ("overlap relief") for these profits when you cease business or change your accounting date.
- Due to the effect of inflation, it is probable that your overlap relief will be worth less in the future. For this reason, it is better to choose a 31 March accounting year-end.
- If your profits were higher in earlier years than they are now, there may be an immediate tax benefit in changing your accounting date.
- Where profits are seasonal, selecting a date before a peak in your profitability will delay the payment of tax.
- Finalising year-end accounts can be a time-consuming process and so it is better to choose a time of year when you are less busy. Normally, you will need to carry out a stock take and make sure you have correctly valued your debtors and creditors.
- When you eventually terminate your business, the earlier in the tax year of the date of your final accounting year-end, the lower the profits that will be assessed in the final tax year.
An accounting year-end is not set in stone when first chosen. The factors above may influence your decision to change an accounting date at any time.
Written by Raphael Coman of Coman & Co.