If you’ve ever wondered what the difference is between your trading year and the tax year, your curiosity couldn’t have come at a better time.
HMRC have recently introduced changes that make distinguishing between the two – and choosing the correct trading year – all the more important.
The tax year and trading year of your business might not always match up
Many business owners assume they’ll be taxed on the profit they made during the tax year from 6 April to 5 April the following year. In fact, your year-end doesn’t have to be 5 April. In some cases, it’s actually more beneficial if it’s not.
Most sole traders and many limited companies opt for a year-end of 31 March. If your business accounting period ends on 31 March, HMRC will accept it as close enough to 5 April to avoid any complicated adjustments.
(In reality, a year-end that’s not the end of the month can cause issues in online accounting software).
A year-end that differs from the tax year can be beneficial for certain businesses
Seasonal businesses often prefer to align their trading year with how their market operates. For example:
- Fashion businesses may set their year-end to align with the end of a season.
- Firms in the education sector might make sure their trading year coincides with the school year.
- Retailers often prefer a December year-end, so they can differentiate the pre-Christmas surge in revenue from the January sales.
Businesses allocate their trading period like this to get the most useful information from their accounts. Equipped with the most informative data, they can make better decisions that move their business forward.
Whether you’re a seasonal business or not, consider what kind of trading year would give you the very best financial data to help with the big decisions.
It’s possible to change your trading year (with some restrictions)
Luckily, the process of switching to a new trading year period isn’t as tricky as you might think.
If you’re a sole trader
- You just need to draw up accounts for your new accounting period and put this date on your tax return.
- For the new date to be effective for tax purposes, your return will need to be submitted on time and the new accounting period can’t be greater than 18 months.
- From 2024-25 this date basically gets ignored for tax purposes, and you will be taxed on profits between 6 April and 5 April no matter what your year end is.
- You might still prefer to have a different year end that you use to manage your business, you will just need to make sure you understand what you will be taxed on.
If you own a limited company
- Your financial year end is set by Companies House, with the default date as the end of the month in which your business was first incorporated.
- If you want to change your year end, you can opt for a shorter or longer trading period with a maximum trading period of 18 months.
- HMRC will look at it differently for corporation tax purposes. A corporation tax accounting period can’t be longer than 12 months. This could mean you have to file 2 corporation tax returns if your accounts cover a period that is more than 12 months.
A word of warning: Companies House only lets you extend your year-end once every 5 years, so choose wisely!
Set a trading year that benefits your business
The best trading year period isn’t one-size-fits-all. It differs for every business, depending on its circumstances.
There’s a lot to factor in, and the pressure to make the right decisions can be overwhelming when you’re already up to your eyeballs in running your business.
If you’d like help establishing what trading year would give your business the most informative, action-based data, we’re here to provide our expert advice. Think of us as the backup your business deserves.
Fill in our form to get started, and we’ll be in touch for a chat.