1. Summary of Key Points
- Choose either 31 March or 30 April as your year-end if you are a sole trader or partnership.
- If you are likely to have stable early year profits, choosing 31 March makes doing tax returns simpler.
- If you have increasing profits in your early years, you’ll reduce the early tax payments by choosing 30 April.
- The drawback of choosing 30 April is that up to 11 months’ of your profits will be taxed twice.
- You will get relief for this by ceasing trade, “going limited” or changing your accounting date.
- Choosing 30 April also grants you more time between your year-end and the date your tax return is due.
2. Background
People setting up in business as sole traders or partnerships should think carefully about which date they make up their accounts to – their year-end. This is because the tax rules can make it very favourable to choose a particular year-end in the early years of trading. Note that this does not apply to limited companies because a separate set of rules governs the timing of tax payments from them.
3. 31 March, 5 April or 30 April?
These are the only three dates it makes sense for non-limited businesses to have as their year-end:
- 5 April is the end of the tax year.
- 31 March is the nearest month end to that date.
- 30 April potentially leads to reduced tax payments in the early years of the business.
Let’s simplify matters. HMRC will accept accounts made up to 31 March as if they were made up to 5 April. So we can now narrow the choice to either 31 March or 30 April because:
- Most people work to month-ends.
- This avoids the hassle of splitting April into the first 5 days and last 25 days, with the potential for error this involves.
4. Why should I consider the 30 April?
There are 2 main reasons for considering 30 April as your year-end:
- A business with increasing profits will have lower tax payments in the early years.
- You will have more time between the year-end date and the date the tax return is due.
The main drawback in choosing the 30 April is that profits for some months will be taxed twice – the overlap profits. These overlap profits will be recorded online on your tax return and carried forward until either:
- You cease trade, or
- You change your year-end.
In the same way, any lower tax payments you achieve in the early years will result in extra tax payments – less the relief for overlap profits – when you either cease trade or change year-end.
5. A Worked Example with 30 April as the Year-End
Rob starts business as a sole trader on 1 May 2009. He invests a lot in marketing and has taxable profits of £6,000 in the year to 30 April 2010. After this, business takes off and his profits are 20,000 in the year to 30 April 2011.
Year 1
The rule for the 09-10 tax year is that Rob’s taxable profits are from 1 May 2009 to 5 April 2010 – 5,573. This is exactly the same whether he chooses 5 April, 31 March or 30 April as his year-end.
Year 2
The rule for 10-11 tax year is that his taxable profits are based on the 12 month accounts ending during the 2010-11 tax year. If he has chosen 5 April as his year-end, he’ll have accounts from 6 April 2010 to 5 April 2011 and they’ll show 25 days’ at the £6,000 per year rate and 340 days at the £20,000 rate – 19,079. The tax on this will be due on 31 January 2012 and 31 July 2012.
But if he’s chosen 30 April as his year-end, his accounts from 01 May 2009 to 30 April 2010 end during the 10-11 tax year. So his tax return profits are now 6,000. This tax is still due on 31 January 2012 and 31 July 2012. So by choosing 30 April, Bob has:
- Reduced the payments due on 31 January 2012 and 31 July 2012.
- Given himself an extra 11 months between his year-end date and the date his tax return is due.
But notice that his profits from 1 May 2009 and 5 April 2010 – 5,573 – have now been taxed twice. These are termed overlap profits. He can obtain relief for this double taxing only by ceasing his trade or by changing year-end.
6. What to do about overlap profits?
I believe that the issue of overlap profits is why many – if not most – accountants recommend 31 March year-ends for their non-limited clients. But this is anything but a show-stopper:
- Once taxable profits are above £15,000 and can be expected to remain above £15,000, sole traders can probably save money by forming a limited company. At this stage, they can cease trading in their unincorporated business and get relief for the overlap profits in their final year.
- Alternatively, once profits have stopped accelerating, if the trader does not want to “go limited” then he or she can have a longer accounting period ending on the next 31 March. So they are now aligned with the tax year-end, and will get overlap relief against the taxable profits of the long accounting period.
7. Why does the tax year end on 5 April?
Back in 1752, the calendar system changed. When the Gregorian calendar was introduced, 11 days just disappeared. At that time New Year’s Day was 25 March so the switch meant that the “year-end” became 5 April.