The take-away from this article (which may be as much as any of our readers want or need to know) is that if you are a sole trader or a trading partnership with an accounting date that falls early in the tax year, you may want to think about changing your accounting date to 31 March. Stay with us for the explanation.
Ultimately, of course, any reduction in profits reduces the tax you pay. But how quickly this happens is affected by the date to which you draw up accounts. So this note is about timing, not absolute reduction in taxable profit.
Assume that you draw accounts to 30 April. In the normal run of things, your tax bill for 2019/20 (normally payable January 2020, July 2020 and January 2021, though the payment on account due July 2020 can be deferred to January 2021) is based on your profit for the 30 April 2019 year. For 2020/21 (payable January 2021, July 2021 and January 2022) your tax is based on your 30 April 2020 year, and so on. This means that there is significant delay before any downturn in results affects the tax that you pay: if you are expecting a dip in profits over the coming twelve months, it won’t start to feed through to a lower tax bill until January 2022 at the earliest.
You can cut that delay by changing the date to which you draw up your accounts. But working out when it’s worth doing (if at all) isn’t always simple.
For example, drawing up accounts to 31 March 2020 will mean that your tax for 2019/20 will be based on the profits of the 23 months from 1 May 2018 to 31 March 2020, minus ‘overlap relief’ (which will be an amount equal to the profits you made at some earlier 11-month period of your business life: usually but not always the first 11 months’ profit). So if the profits of the period 1 May 2019 to 31 March 2020 are significantly less than ‘overlap relief’, the net effect of the change of date will be a reduction in taxable profits, and a reduction in the tax payable in January 2021. Whether that’s the case may depend on the nature of the business and the provisions that need to be made as at 31 March 2020.
Alternatively, if COVID-19 (coronavirus) hasn’t materially affected your business results in 2019/20 but is expected to do so in 2020/21, you could consider amending your accounting date to 31 March 2021. In the same way as explained above, that would reduce taxable profits for 2020/21 if the profits for the 11 months to 31 March 2021 are less than the ‘overlap profits’.
And remember that if (whether or not by dint of changing accounting date) you are unfortunate enough to have suffered not just reduced profits but trading losses in the tax year just ended, the quicker you are able to file your tax return and establish the losses with HMRC, the quicker you will be able to claim tax relief for them and obtain any available tax repayment.
For more information, please get in touch with your usual BKL contact or use our enquiry form.
We have further guidance and information for business owners at our website’s coronavirus hub.
Above all, stay safe and stay well.