What is the best date to choose?
Here are some of the issues to consider when choosing which date to have your accounting year start.
Q. Can I select any date for my accounting year end?
The choice of a year end accounting date is for the business owner to decide.
Under the current year basis, the taxable profit for a particular tax year is determined by the accounts that end in that year.
Thus, for 2020–21 tax, accounting dates will vary between 6 April 2019 and 5 April 2020. So what is the best date to choose?
Sometimes, compelling commercial reasons relating to the nature of the trade will dictate the most appropriate accounting date. Otherwise (as in so many tax matters), there is no easy answer – it all depends on the particular circumstances.
Where profits show a trend, the rule of thumb is that (all other things being equal) it is beneficial to have an accounting date early in the tax year if profits are rising, and late in the year if profits are falling.
Of course, all other things are not equal, and in evaluating the advantages and disadvantages of particular accounting dates there are a number factors to be considered, including:
- interest rate movements
- the effects of inflation
- changes in rates of tax
- changes to the tax system
No one can say how these will change over time, and so, not surprisingly, businesses tend to be swayed by the short-term advantages, which have at least some degree of predictability.
Timing of payments on account
It is as well to remember that the date for the first payment on account falls just over two months before an accounting date of 5 April, but nearly ten months after an accounting date of 6 April. Thus, with an accounting date later in the tax year you could pay too much tax on account where profits are falling, and this is a further factor affecting cashflow.
Using a 5 April (31 March) accounting date leads to the simplest application of the current year basis of assessment. However, it does mean that the timetable for tax payments and returns is very tight, and there is therefore an increased risk of incurring penalties. Also there is now less time to allow for tax and business planning relating to tax issues.
If you expect your profits to show an overall upward trend, there are clearly cashflow advantages in having an accounting date at or shortly after the beginning of the tax year. In these circumstances, it is important to ensure that you make proper provision for the increased liability that will occur when the business ceases.