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For those businesses that have been hard hit by coronavirus, particularly those that have made or are at risk of making losses, now might be the time to consider changing your accounting year end date.
This could offset some of the pain of what has been an extremely difficult time by reducing the amount of tax you have to pay this year and next.
Take the example of an individual or a partnership which typically draws its accounts up to 31 March. For the year to 31 March 2020 their trading performance may be reasonable, since it was only at the very end of that accounting period that the full challenges of Covid-19 were becoming apparent and the business sadly became loss making as a result.
The accounts for the year ended 31 March 2020 will form the basis of the tax year 2019/20 and that tax is payable in instalments in both January and July 2020 (the latter can be deferred until next January), with any balance due for payment on 31 January 2021.
For those businesses currently suffering financially, paying tax in January 2021 might be difficult at exactly the time when cash flow is at greatest risk. This is particularly the case if they are suffering losses since the end of March this year.
Now consider the situation of the same business that draws up an 18-month set of accounts to 30 September 2020, thereby capturing the current loss-making Covid-affected period. While the rules regarding tax basis periods are somewhat complex, incorporating an element of the loss-making period results will lower the taxable profit for 2019/20, as shown in the graph below.
Reducing taxable profits in 2019/20 will reduce tax payments now and in calendar year 2021.
Consequently this results in lower tax due for payment in January and July of this year, as well as in January 2021. There will also be consequential reductions in the payments on account during calendar year 2021. Reducing tax payments at a critical time may release precious funds for the business.
The next best thing to tax saved is tax deferred – especially now that cash is tight
The opportunity for a company is virtually identical to that for individuals or partnerships. Extending trading periods by up to a maximum of 18 months can enable a business to claim the tax relief arising from a difficult trading position earlier, thereby reducing more immediate tax payments at a time when cash flow is tight.
While certain criteria need to be met to enable a change of accounting year end, generally businesses will have enough commercial reasons to justify such a change.
Taxpayers should also consider the implications of a change of year end should profits return to their previous levels. For example, moving away from a 31 March year end may well result in a delay before tax is paid on rising profits, which itself may be seen as an advantage. After all, the next best thing to tax saved is tax deferred.
Our example of a 31 March year end is just one scenario. If your business has another year end, such as 30 April or 30 June, then you may or may not need to consider whether you can alter your year end date so that you get the earliest benefit in terms of lower tax payments resulting from coronavirus trading issues. Either way, in almost all cases where current trading is difficult, changing year end is likely to be fiscally advantageous.
Changing your year end also requires some thought with regard to claiming capital allowances on investment in plant and equipment. For example, extending the year may pick up on later equipment purchases which could deliver 100% tax relief but at the same time may also pick up on equipment disposals, if assets have been sold during a period of downturn.
As always, taking early and proactive advice is critical in managing your overall tax liabilities, and that is only one aspect of our input with clients.