The information below should lead you to the following conclusions:
- A 31 March year end will be the easiest year end from a tax admin perspective it will also not involve any double taxation on overlap profits;
- A 30 April year end will result in the longest gap between earning profits and paying the taxman, though you will pay tax twice on 11 months worth of profits. If your profits are small in this period that should not be a cause for concern. If you make a loss in this period it is advantageous; and
- You can get back tax paid on overlap profits any time by incorporating your business.
Your decision on when to choose your accounting year end for your sole trade or partnership should be led by your priorities when consider the three following benefits:
- The most straightforward approach;
- Creating the largest delay between your year end and paying HMRC; and
- Avoiding/incurring overlap profits.
The most straightforward approach (31 March)
A year end of 31 March keeps your tax return simple. HMRC will accept accounts made up to 31 March as if they were made up to 5 April, meaning your year end is the same as theirs.
- Your first trading period will be however many months to go till 31 March and then each subsequent period will be 12 months.
- You will not incur any tax on ‘overlap profits’.
- You will get 10 months between your year end and paying HMRC your first instalment.
Creating the largest delay between your year end and paying HMRC (30 April)
After your first trading period (which will end 31 March in all cases) your taxable profits are based on the 12 months accounts ending during the tax year. So an April 2012 year end will be taxed in the 2012-13 tax year (as 30 April 2012 falls between 6 April 2012 and 5 April 2013).
- Tax on profits will be paid on the 31 January that occurs 21 months after your year end and the 31 July that occurs 27 months after your year end. A big gap!
- If profits are growing you will be making lower cash tax payments, compared to your profits, in the early years.
- But, you will incur overlap profits.
Overlap profits mean you are being taxed on the the same profits more than once. If you have a year end of April you will be taxed twice on 11 months worth of profits, below is a worked example of how this comes about. This is not permanent, over the lifetime of the business you will only be taxed on your profits once though to get back the tax paid on your overlap profits, through overlap relief, you will either have to incorporate your business, change your accounting year end or cease trading.
This should not be a large concern as if you are taking a long term view of your business growth it is likely you will want to incorporate eventually so as to benefit from the limited liability and lower taxes that incorporation offers.
A further consideration is that if you anticipate making a tax loss in the overlap period, due to significant expenditure on marketing for example, you will receive the tax benefits of this loss twice (at least until one of the three events mentioned above occurs).
Example of a 30 April year end
Mr Bee starts business as a sole trader on 1 May 2010 and draws up accounts to a 30 April year end.
The rule for the first tax year is that Mr Bee’s taxable profits are from 1 May 2010 to 31 March 2011. The first period ends 31 March regardless of which accounting year end is chosen. Tax on these profits are paid on 31 January 2012 and 31 July 2012.
The rule for the next tax is that Mr Bee’s taxable profits are based on the 12 month accounts ending during the 2011-12 tax year. Mr Bee’s next year end occurs on 30 April 2011 (only one month later than his last period end). The HMRC rules mean that Mr Bee must pay tax for the 12 months up to this date. Therefore he is paying tax for the period of 1 May 2010 to 30 April 2011, which will not be paid until 31 January 2013 and 31 July 2013. You will notice that tax has already been paid on 11 of these months, these are overlap profits.
All subsequent tax period will be the 12 months ending 30 April and no additional tax on overlap profits will be incurred.
Outcome of different year ends
30 April is not the only year end to incur overlap profits all year ends with the exception of 31 March will incur some double taxation. See the table below, along with the corresponding gap between incurring profits and paying the taxman.
|Year end date||Number of months overlap profits taxed||Months between accounting year end and paying HMRC (year 2 onwards, Jan/Jul)|
Though remember you can get the tax paid back by incorporating and claiming overlap relief.