Choosing the best financial year end for your business
While completing your annual accounts at the end of the tax year might seem the most straightforward option, you can decide your own financial year end for your business.
Your tax bill in any given tax year is then calculated by referring to profits made during the accounting year ending in that tax period. So if your accounts end on, say, June 30th 2013, they will be used to work out what you owe HMRC for the 2013/14 tax year.
A number of factors will affect the decision regarding your accounting year end. For a relatively young business, for instance, which you expect will make more money after its first year, having a financial year end early in the tax year – such as on April 30 – will help you keep initial tax bills low.
Another consideration is the seasonal nature of certain businesses, which, for example, are especially busy at Christmas time. By having a November year end, you would buy yourself another 12 months to pay tax on your December profits. Additionally, this will mean you are not worrying about filing a tax return during your busiest time of year.
For a growing business whose profits are on the rise, an accounting year at an earlier point in the April to April tax period will help keep the amount you owe HMRC down. Conversely, if your profits appear to be decreasing, a later year end will help.
This needs to be balanced against the obvious fact that the later in the tax year your have your accounting date, the less time you have to pay the relevant tax bill, so there is an increased possibility of incurring late payment penalties.
Of course, you can’t change your financial year end an infinite number of times, but it’s definitely worth assessing the figures, especially if your profits seem to be changing.
At the same time, there are external factors to take into account, such as interest rate shifts, alterations in the rate at which tax is charged and changes to the tax system itself.
Over time, it is impossible to say how these things will change; therefore, unsurprisingly, many businesses tend to be swayed by the more predictable (if short-term) benefits of changing their accounting year end at some point.
Equally, bear in mind that opting for an accounting date later in the tax year could result in your paying too much tax on account if profits are decreasing, and this is another factor which can affect cashflow.
In conclusion, if you use a 5 April accounting date, this can keep things simple, but it can also make the timetable for submitting returns and making payments very tight, and you may also find you have less time to allow for business and tax planning.
Additionally, if you know your profits are changing, it could well be time to consider altering your accounting year end date.
Talk to us at Four M – our accountants and tax planning experts have a wealth of expertise and can help you discuss the best year-end accounting date for your business as your circumstances change.