Pam Sayers explains why you may wish to change your accounting date.
The majority of professional practices choose an accounting date early in the tax year, e.g. 30 April, in order to maximise the cash flow benefit of deferring, as long as possible, partners' tax payments on their share of the firm's taxable profits.
Thus, if a firm has a year-end of 30 April 2008, partners' tax payments (on this income) fall due on 31 January 2009, 31 July 2009 and 31 January 2010. The first payment is due 9 months after the end of the financial year; the second payment is due 15 months after the end of the financial year with any balance of tax payable 21 months after the end of the financial year. This means that partners will have overlap profits equating to approximately 11 months.
What if there is a decrease in profits?
An April year-end is beneficial when profits are increasing since the balance of tax does not become payable until 21 months after the end of the financial year. However, given that your firm may now be facing a decrease in profits, you should consider whether it is still beneficial to have an April accounting date. Generally, when profits are decreasing it can be advantageous to have an accounting date towards the end of a tax year, e.g. 31 March.
By changing an accounting date from April to, say, March, you will crystallise partners' overlap relief. Firms facing a decline in profits may, therefore, wish to review their anticipated profit for the current financial year and compare this with the overlap profits to identify if there is any merit in changing the firm's accounting date.
You should note that HMRC restricts the number of occasions that a firm can change its year-end.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
