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Considerations of changing financial year end

by Catherine Pinner

As we have highlighted in previous issues of the Rickard Luckin Agricultural Briefing , the way HMRC assesses business profits is changing, effective from the ongoing tax year 2023–24.

Sole traders, partnerships, and limited liability partnerships

Unless there is a strong commercial reason not to change, most businesses will choose to amend their year end to 31 March or 5 April as profits will be taxed on the tax year basis, rather than the profits in the accounting period ending in the tax year. If the business year end is not either 31 March or 5 April then the profits will have to be apportioned from two accounting periods.

As noted previously, tax arising on profits in the transitional period can be spread over five years.

If you are changing your year end there are other matters to consider:

  • The new financial period may be longer or shorter than your previous accounting period but if your sales/expenses do not occur evenly throughout the year, then any extension in the accounting period may not automatically increase your profits in proportion with the extension. This is particularly noticeable within agricultural businesses. Costs generally occur during the harvest year from October through to May and the sales occur after harvest from July/August.
  • If you think that you are going to have higher profits in the transition period, you could consider preparing two sets of accounts so you can demonstrate that the higher profits arose in the transitional period and that these can be spread over five years. If only one set of accounts is prepared, then the profits will be time apportioned.
  • Please be aware that the capital allowances will be apportioned to the period in which the asset is purchased. Therefore, you may wish to delay making any capital purchases in the transitional period as this would reduce the transitional profits and the amount of tax that can ultimately be spread over the five years.

Practical considerations

  • Ensure that your accounting software period end is updated. Some software can easily shorten the period end but some struggle with lengthening the period, so you may have to two accounting periods for the transitional year. The first up to 12 months and the second period to cover the remaining months.
  • If you prepare VAT returns quarterly rather than monthly, consider aligning your VAT quarters with the year end to make reconciliations easier.
  • Ensure you perform a stock take at 31 March/5 April. You may also wish to consider what the stock was at the ‘old’ year end if you think this might affect the profits demonstrated to arise in the transitional period.
  • Make a note of when your partial exemption year ends and ensure these are submitted correctly to HMRC.
  • Consider aligning non-financial deadlines with the accounting period end. It can be helpful to align the holiday year end, as it saves having to calculate the holiday pay accrual for employees. However, pay rises, bonuses and promotions may be easier if they are not aligned with the year so that there is less to concentrate on when you are trying to pull the details together for the end of your accounting period.
  • At the end of the financial period, remember to undertake the usual reviews and reconciliations to ensure that all transactions are included and supported with the appropriate records and appear as expected. As this is a new date, it may be helpful to add a diary reminder.
  • Review the impact of the change in year end on any loan agreements or lease agreements.

Should you wish to talk through any of the above points, please contact your usual accounts or tax manager

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