Choice of accounting date

By Tolley
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The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Choice of accounting date
  • Factors to consider
  • Cash flow
  • Administration
  • Deferred tax position
  • Short-term factors

Factors to consider

When choosing an accounting date for a business, there are advantages and disadvantages in picking certain dates.

There are three key factors to consider:

  • cash flow
  • administration, and
  • deferred tax position

There can be also short-term benefits in selecting, or changing to, a particular year end. This is of relevance where there is a change in tax rate or taxpayers’ wish to crystallise the deferred tax asset of overlap profits.

Cash flow

There are advantages to having a year end that finishes early in the fiscal year. An early year end, such as 30 April, means that there is a longer gap between making profits and paying tax. Compare a March and an April year end in 2019:

There is only one month’s difference in year end, but the April year end benefits by not having tax falling due for an extra year.

This can be a double-edged sword. This benefit can be cancelled out by the tax liability being disassociated, or ‘alienated’, from the relevant profits. A client with an early year end can easily forget how their liability has arisen. Also, very few individuals who run their own business will simply set aside the money to accumulate interest. Therefore, the taxpayer needs to be reminded of their future liabilities and the bases on which they arise.

The main cash flow benefit arises where profits are fluctuating. Where profits rise from one year to the next, this defers the increased tax liability by 11 months. The business has longer to provide for income tax.

Where profits fall from one year to the next, there is sufficient time to accurately calculate an appropriate reduction in the taxpayers’

More on Basis periods: