This is often a question that many organisations are faced with before trading can commence, however it is not a decision that needs to be permanent throughout the life of a business.
Without much thought, many will simply choose their accounting year end date as the end of their first 12 months of trading. Whilst you can choose any year end date you want, it is important to consider the tax implications of this decision.
HMRC created ‘Opening year rules’ in order to collect tax from new businesses in their first year of trade. Choosing a year end other than the 31 March/5 April can result in an overlap of profits and you may find yourself having to pay tax on the same profits in two different tax years – an additional cost to your business you may not have expected or budgeted for.
It is possible to claim relief for these overlap profits, but most often this will not be allowable until cessation of trade. However, there may be an alternative option for claiming this relief earlier: by changing your year end date, providing it takes place within 3 years of commencement. It is important to carefully consider the new year end, as some changes can create further overlap, whilst others relieve it.
There are 4 possible outcomes:
- Create a set of accounts for less than 12 months. In this case, you need to tax 12 months to the new date – this will create an overlap.
- Create a set of accounts for longer than 12 months. In this case, you tax it but relieve overlap to bring it down to a 12 month period.
- Create two periods ending in the year of change – tax both and relieve overlap as in outcome 2.
- Create no year ending in the year of change. Here you will have to work back 12 months from the new date and tax 12 months to this date (and then you have effectively created another year end) – this creates overlap.
Only options 2 and 3 will allow you to relieve overlap.
Unable to decide on your year end or thinking of a change? Please contact Green and Co for further advice and guidance.
Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.
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