Choosing the right accounting period may be an important decision for your business – here we examine why, and what impact it may have for you.
Your accounting period is important as it defines when your profits are assessed for tax purposes.
You are taxed on your accounting year ending in the tax year (6 April – 5 April). So for the tax year ended 5 April 2016, anybody with an accounting year end of 30 April 2015 to 5 April 2016 will have those profits assessed in that tax year. If your business has a 30 April year end, you are effectively nearly a year behind those with a 5 April year end !
If you’re a start up in the opening years of trading, the rules differ. Take as an example a business which commences trading on 1 January 2015 and chooses to prepare accounts to 31 December each year. It starts to trade in the tax year ended 5 April 2015 and under commencement rules, it will be assessed on the period from commencement to 5 April, which in this case would be 1 January 2015 to 5 April 2015.
For the second tax year (year ended 5 April 2016), there is an accounting date ending in the tax year which is at least 12 months in length, ie year ended 31 December 2015 so that becomes the basis period. However, you will notice that the profits from 1 January 2015 to 5 April 2015 are taxed twice as they form part of the basis period for both of the first 2 tax years. These become what is known as the overlap profits and relief is given for these when the business ceases or if it ever changes its year end.
Let’s change this by using the example of a business commencing on 1 January 2015, but instead choosing to prepare accounts to 30 June each year. Once again, the first tax year is the period from 1 January 2015 to 5 April 2015. For the second tax year (year to 5 April 2016) there is not an accounting date ending in the year which is at least 12 months long, as at 30 June 2015 the business had only been trading 6 months. In this scenario the 12 months from commencement of trading are the basis period, ie 1 January 2015 to 31 December 2015. The third tax year then reverts back to the usual rules of the year ending 30 June 2016. The overlap profits here are 1 January 2015 to 5 April 2015 which are taxed in the first 2 years, then also 1 July 2015 to 31 December 2015 which is taxed in the second and third tax years!
We will continue this topic in our next article, but if you need any help understanding when is the best accounting period for your business, do get in touch.