TXF6 UK
Syllabus B. Income Tax And Nic Liabilities B3. Income from self-employment

B3g. Choice of accounting date

Syllabus B3g)

Recognize the factors that will influence the choice of accounting date.

What accounting date should you choose?

The choice of accounting date will affect:

  • The level of profits to be taxed in that year

  • The overlap profits created

  • The timing and amount of tax payments.

Advantages of tax year ending on 05/04

  1. No overlap profits created

  2. Minimise the final year’s liability

  3. Simplicity

Advantages of tax year ending on 30/04

  1. Time to prepare accounts and calculate tax.

  2. Time lag between earning income and paying tax.

Conditions to change an accounting date

An individual must meet certain conditions in order to qualify to change an accounting date:

  • The change of accounting date must be notified to HMRC by the 31/01 following the tax year in which the change was made.

  • The first accounts to the new accounting date must not exceed 18 months in length.

  • A change of accounting date must not have occurred within the previous 5 years.

When an accounting date is changed, if the accounts are prepared to a period that is longer than 12 months, then overlap profits can be deducted. (Note that overlap profits cannot be deducted to the extent that they create a period of less than 12 months)

However, if the accounts prepared to a period are shorter than 12 months, then 12 months to the new accounting date must be taxed, which will create more overlap profits.

Illustration for change of accounting date (Period longer than 12 months)

Jake has always had an accounting date of 31/12.

His trading profits for the year ending 31/12/2017 are £15,000.

He wants to change his accounting date to 31/3 and will prepare accounts to 31/3/2019. 

His profits for the 15 month period to 31/3/2019 are £18,000.

He has 4 months of overlap profits totalling £4,000. 

What profits will be assessable in 18/19?

Solution

18/19 

15 month profits to 31/3/2019 £18,000
Less: overlap profits (£3,000)
Taxable profits £15,000

Note: you cannot reduce a long period to less than 12 months so in this case we could only use 3 out of the 4 months of overlap. The remaining overlap profits of £4,000 will be carried forward for use on cessation or if there is another change of accounting date in the future.

Illustration for change of accounting date (Period shorter than 12 months)

Jake has always had an accounting date of 31/12.

His trading profits for the year ending 31/12/2017 are £15,000.
He wants to change his accounting date to 30/4 and will prepare accounts to 30/4/2018. 
His profits for the 4 month period to 30/4/2018 are £8,000.

What profits will be assessable in 18/19?

Solution

18/19 
Tax 12 months to the new accounting date
12 month profits to 30/4/2018   £8,000 + (8/12*£15,000)
Taxable profits £18,000

Therefore, overlap profits of £10,000 were created.