The period taxed will be the accounting period ending in the tax year for which the return is being prepared. This is fairly simple once a business is established, but the opening and closing periods of a business are subject to specific rules to ensure all profits are taxed, and the choice of accounting year end can produce a cash flow advantage.
For example, a business is started on 15 June 2018 and accounts are prepared from 15 June 2018 to 30 June 2019.
The 2018/19 tax return will show profits accruing between 15 June 2018 and the end of the tax year on 5 April 2019.
The 2019/20 tax return taxes 12 months profit up to the accounting date falling in the tax year. So the period from 1 July 2018 to 5 April 2019, which has already been taxed the previous year, is taxed again. Profits which are taxed twice are called overlap profits.
In subsequent years, profits up to the accounting date ending in the tax year are taxed, so each tax year the 12 months’ profit to 30 June is taxed, until the year the business stops. In the closing year, all profits made in the tax year are taxed, but overlap profit from the opening years is deducted.
So, if profit is initially low and likely to increase, there can be a cash flow advantage in choosing a year end which falls early in the tax year, because the lower profits will be taxed in two tax years.
Conversely, if profit is initially high and likely to fall, it would be better to choose an accounting date ending at the same time as the tax year end.
If losses are being made initially, it can be best to have an accounting date in line with the tax year, so that losses can be used as soon as possible. Relief for losses is only given once, it is not possible to have an overlap loss.
Change of Accounting Period
Changing the accounts year end can be useful to accelerate or decelerate the timing of the assessment of profits. If there are high overlap profits, it is not necessary to wait until the business closes to get relief. The accounting year date can be changed either for commercial reasons, or if the following conditions are met:
- HMRC must be notified by 31 January following the tax year in which the change is made.
- The new accounts must not be for a period longer than 18 months.
- There has not been a previous change of accounting year end in the last 5 years, unless a genuine commercial reason now exists for the change.