At McDade Roberts accountants we often get asked by new businesses about choosing their accounting date. We hope the below gives you some more ideas about what you need to think about before setting the date.
Sometimes, compelling commercial reasons relating to the nature of the trade will dictate the most appropriate accounting date. Otherwise, there is no easy answer - it all depends on the particular circumstances.
There are several basic considerations:
Be Aware of Overlap Relief
The tax system is designed so that, over the life of a business, tax is paid on no more and no less than the cumulative profits of the business. However, unless your accounting date falls between 31 March and 5 April (inclusive), there will be some element of double counting, or overlap in the first full tax year. Overlap relief will be held in reserve for use when the business ceases. One concern is that, because of inflation, overlap relief will be worth less in future years than it is at present.
Bunching Of Terminal Profits
The converse of the overlap situation is the 'bunching' effect of profits when a business ceases. The assessment for the final tax year will be based on the profits right back to the accounting date in the previous tax year. The earlier in the tax year the accounting date falls, the longer will be the period of account relating to the final assessment.
Pattern Of Profits
If profits do not vary significantly from one year to the next, the accounting date will not affect the assessable profit for each tax year.
Where profits show a trend, the rule of thumb is that it is beneficial to have an accounting date early in the tax year if profits are rising, and late in the year if profits are falling.
External Factors
There are a number of external factors that need to be considered too.
- interest rate movements
- the effects of inflation
- changes in rates of tax
- changes to the tax system
Timing of Payments On Account
It is as well to remember that the date for the first payment on account falls just over two months before an accounting date of 5 April, but nearly ten months after an accounting date of 6 April. Thus, with an accounting date later in the tax year you could pay too much tax on account where profits are falling, and this is a further factor affecting cashflow.
Need Advice?
So many business decisions can have an impact on tax, even which date you choose to start your tax year from. At McDade Roberts we pride ourselves on giving clear and friendly advice so what is stopping you picking u