As a sole trader, many people assume that they will be taxed on their profits that have arisen during the tax year. So, for the tax year ending 5 April 2012, they will be taxed on their profits from 6 April 2011 to 5 April 2012. That doesn’t have to be the case, and sometimes it can be beneficial to have a trading year which differs from the tax year.
If you are self employed, you may prefer to have your accounting period or trading period end on a different date. For example if you started trading on 8 August 2010, you may prefer to have your first accounting year end be 31 July 2011. Maybe you are in fashion, and want your trading year end coincide with a season end. Or if you are in education it would make sense for your new trading year to coincide with the new school year. It can make a lot of sense to have your year end fit your business seasonality so you get the most useful management information out of your sole trader accounts.
There could also be tax benefits to having a year end which differs from the tax year end. Although some of the rules around which profits get taxed in which tax year are a little complicated, once you’ve got through the first couple of years of trading then you will be taxed on the profits from your trading year that ended during the current tax year. So if your trading year end is 30 June 2011, then for the 2011-2012 tax year you will be taxed on the profits for the year ended 30 June 2011, NOT on the profits for the year ending 5 April 2012 (assuming that this is your third year or more of trading).
If you are likely to see your business expanding and becoming more profitable over time, then having a trading year end which is different from your tax year end could mean that the increase in tax payable is delayed.
Make sure you discuss the timing of your trading year end with your accountant to see what works best for your business.