We live in an age of information where knowledge is a precious resource. But we are all guilty of googling something and trying to interpret the information we are given not knowing how accurate the information really is.

Many a zoom quiz has dragged on into the night with such debates where no one really knows what the truth is.

Sadly, the same can be true when someone outside your business reviews your year-end accounts to assess your business’s financial stability and credit score.

The interpretation of the financial figures without understanding specific conditions inside your business can lead to a wrong impression being made. This can cause banks or suppliers to get nervous and reduce credit or loan facilities. These credit risk assessments play a significant role in how confidence between businesses can either sustain or dent our economic recovery.

Ultimately you do have some control over the data your business has to present to the world. Below are some ideas to consider if you are concerned that the figures of the business are not representative of the true position.

All businesses can alter their year-end whether they are incorporated or not. It presents a lot of interesting planning points but should not be taken lightly. It is about balancing benefits against potential risks and costs.

Advantages to a well-chosen year-end

Setting your year-end at the right date can have a number of practical benefits. If you have your year-end at your busiest time of year then it might mean that you do not have the resources to keep on top of the numbers.

Your accounts include a snapshot of your balance sheet. In effect this is a statement showing how much the business was owed, how much it had in the bank and how much it owed to others on the last day of trading for that year. It is very arbitrary. If you pay out a supplier one day early you might unintentionally show a much lower cash position than normal.  Your busiest time of year might also be when your cashflow is at its worst.

If you have to undertake a stock take at the year-end, then this might lead you to prefer a year-end for a period when stock is at a low point. As auditors we lots of grumbles about stock-takes on 31st December just when everyone is getting ready to celebrate the new year.

Thinking of what the “snapshot” shows is important because the balance sheet for a limited company or LLP is publicly available. It is also the first port of call, for any business, that is being reviewed for their financial stability.

Shortening your year-end

In general, shorting the period of your accounts can be a good tax planning exercise. It allows you to recognise the performance earlier.

For example, if you have had a bad period of trading early in your financial year then shortening the year-end allows the business to recognise losses sooner. By doing this you can utilise “carry back rules” which allow you to offset the loss to the previous, profit making, period of account, which results in getting tax refunds sooner.

Considerations for Limited Companies:

Additionally, for Limited Companies a change of year-end can alter your Corporation Tax payment dates because it changes the filling date for the future periods. In some cases, where the short period is effectively making no profit, it means you can delay when your next Corporation Tax payment is due.

Corporation Tax is payable 9 months and 1 day after the period end that you report to (provided your period of account is 12 months or less). Shortening a year-end effectively brings that date forward from its normal date for the short period.

But it also means that for the next and ongoing 12-month periods following it your tax payment date will be later in the year going forward.  When changing a year-end date, you should consider if this puts your Corporation Tax payment date at a point of the year that is beneficial for your normal cashflows.

Considerations for unincorporated businesses:

For businesses operating as sole trade or partnerships, a detailed analysis should be undertaken because changing your year-end to anything other than the 5th April could impact a thing called overlap profits if not done with care.

This can cause you to pay tax twice for a number of months!  Usually your accounts are primarily intended for inclusion on your tax return, but suppliers and the bank can ask to see your year-end accounts to check on your financial risk. Drawing a balance between tax planning and how the accounts look for finance purposes are vital.

Credit scoring

Shortening a period of account when results are not great is likely to have a negative effect on the business’s credit rating if that short period of account has lower than normal results. If the period makes a loss, then it is likely that the value of your balance sheet will have gone down.

Before changing the year-end, it is important to think about who else may want to look at your accounts and what your future plans are for getting finance and credit terms

It maybe that because of these factors you might prefer to extend your year-end.

Extending the year-end

There are times where for LLPs and Limited Companies may also want to extend a period of account.  Extending a year-end allows a smoothing of the figures.

This has the benefit of effectively Merging less profitable periods in with profitable periods. It may not be so lucrative for tax planning (although in some situations it can be useful) but it provides a very useful tool where you have customers or suppliers who monitor your credit report like a hawk.

This can make a big difference in how the results for an accounting period are reviewed from the publicly recorded accounts.  If you are asked for monthly or quarterly financial reports, then this may not help for those suppliers.

Limited Companies and LLPs can report a maximum accounts period of 18 months. However, you can only extend the year-end once every five years.  It is best to think of this as a bit of a one-off.

Tax impact

For limited companies extending the year doesn’t initially change the date you pay your Corporation Tax.

HMRC will take the total figures for the extended year you are reporting and then pro rata these so that one set of accounts becomes 2 tax returns. The first covers the period for the first 12 months of the year and the second is a shorter period to bring the figures up to the year-end.

For example, let’s say you extend your year-end to 31 March (instead of 31st December). This means your next set of accounts will be a 15-month period, instead of the usual 12. If you made profits of £20,000 for the 15-month period, HMRC will divide this up so that it is reported over two company tax returns.

The first return will be for the period 1 Jan to 31 December (i.e. your normal year-end) but the profit will pro rata the year-end profit so the first tax return would have £16,000 profit (12/15 x £20,000) and the second period would show a £4,000 profit.

Because an extended period results in two tax returns (and tax periods) there are two payment dates for Corporation Tax. This is 9 months and 1 day after each tax period.

For our example above, the first tax period ended 31st December, meaning the first tax due will be 1st October the following year (the same as if there wasn’t an extended year-end).

There will then be a further tax payment due for the second period. From the example this is the 3 months ended 31st March this means a smaller tax payment is due by the 1st January the following year.

We can help

There are plenty of other reasons to review your year-end and not all of them could be covered here.

Changing year-end, although it appears to be simply an item of administration can have very serious consequences for your credit rating, review from suppliers, customers, financiers and the bank so always discuss this carefully and approach with caution. It is worth talking through this with your Client Manager or Principal Adviser before making the change.

Contact us on 01474 853 856 or discovery@a4g-llp.co.uk to get specific tax planning advice for you and your business.

Contact me today!

Josh Curties

BA (Hons) FCA

Partner & Principal Adviser

01474 853856

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