Having just passed the annual self-assessment tax return deadline, hopefully your own return was in by January 31. Of course, that particular submission related to your personal tax calculations for the tax year 2014/15. Currently we’re in tax year 2015/16, which runs until April 5, 2016.
What you do between now and then in terms of personal tax planning will be reflected in the return that you (or your accountant) file by next January (2017). Confused? If so you’re not alone. This subject comes up in many conversations between accountants and their clients, particularly those new to running their own business, and most frequently in this period, running up to April 5 each year.
To try and clarify, we’ll look at this from different perspectives.
You run your own business; it’s not run as a limited company so you’re a self-employed sole trader. Therefore your ’business’ and ’personal’ tax affairs will largely coincide, and the key date each year will indeed be April 5. We won’t go into the rather arcane historic reasons for this particular date being the end of the personal tax year, but in straightforward accounting terms, it is an odd and inconvenient choice. Accounting systems don’t generally produce monthly, quarterly or annual accounting reports to anything other than a calendar month end. So in practice, your annual business accounts will be made up to March 31. It’s close enough to April 5 to allow those accounts to form the basis of your personal tax return each year. If you’re in this position, you’ve now got the rest of February and March to make whatever qualifying capital investment you might need in the business new equipment, for example and you’ll receive the benefit of any resulting capital allowances in this (2015/16) tax year. That’ll keep the tax bill down when you pay it in January 2017. If you delay the same investment until after April 5, then all other things being equal, you won’t feel the benefit until January 2018.
Limited Company Director/shareholder.
You run your own business; you’re a shareholder and director of your own company. Here your personal tax affairs are split from the Corporation Tax affairs of your company. As far as your personal tax is concerned, the relevant date is still April 5. Your tax return for 2015/16 will include the salary you’ve been paid by your company and any dividends you may have drawn in the calendar year to April 5, 2016 so you could choose (for example) to leave that large dividend payment you want out of the company until April 6 or later, that way you won’t have to pay income tax on it until January 2018 rather than 2017. However, as far as your company’s tax affairs are concerned, these dates aren’t directly relevant.
Limited Company Year-end dates and Corporation Tax
Although we all talk about company year-end dates, the technical term is Accounting Reference Date and this can be any month end during the calendar year. The important point to remember is that the company’s Corporation Tax year will effectively be based on its Accounting Reference Date.
When you form a limited company, Companies House will allocate an Accounting Reference Date, which is usually the first month end falling at least 12 months after incorporation. So if you form one on February 12 this year, the first year end will initially be set as February 28, 2017, and future annual accounts will be made up to February 28. Now to avoid making this too complicated, let’s ignore a new company (special rules apply for the very first period) and we’ll assume that your company has been trading for a few years with its Accounting Reference Date of February 28.
In this example, your company will produce annual financial accounts to February 28 each year, and the company’s Corporation Tax return will be based on those financial accounts. The annual accounts have to be filed at Companies House nine months after the year-end date ie in this example November 30. Any Corporation Tax due for this accounting period will have to be paid nine months plus one day after the year-end date, so that will be December 1. Rather strangely, the actual Corporation Tax return itself doesn’t have to be filed until 12 months after the year-end date so that will be February 28 the following year.
Limited Companies choice of year-end date
While you don’t get a choice of initial year-end date, it doesn’t have to be fixed forever. It can be changed, although generally only once in any five-year period, and a common question for accountants is whether there’s any benefit to a particular year-end date. This question is often asked from a tax benefit perspective and the simple answer to that is ’no’ but there are some practical considerations to the choice of date most obviously to tie in with any other companies you might own.
Historically, the majority of UK companies have operated to either December 31 or March 31. Both have some practical advantages and disadvantages. Obviously the first ties in with straightforward calendar years. The second is nearly in line with the personal tax year and so many owner-operated companies choose it to keep personal and company tax years roughly in line. However, December 31 may not be a brilliant choice if you have a lot of stock to count for your year-end accounts. And March 31 can fall slap bang in the Easter holiday period and again may be rather awkward for retailers.
On top of that, your accountant may be snowed under with year-end accounts and tax work centred around those dates, so you may find it takes longer to obtain your accounts.
As always, if you need advice, speak to a friendly accountant we’ll be glad to help.