What is the difference between your trading year and the tax year? Should they be the same? Does it matter?
Many business owners assume that they will be taxed on their profits from the tax year. The tax year runs from 6 April to 5 April each year. (Why? Blame the Gregorian calendar…). Your year end does not have to be 5 April. In fact having a year end that isn’t the end of the month can cause all sorts of problems if you are using online accounting software. Most sole traders, and many limited companies, opt for a year end of 31 March. HMRC accept that it is close enough to 5 April to avoid any complicated adjustments.
You could however have a completely different year end. When would that be a sensible thing to do?
Do you have a seasonal business
If you have a seasonal business you may prefer to have your accounting period or trading period end on a different date. 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. Retailers often prefer a December year end to split up the pre-Christmas volumes from the January sales.
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 accounts. Think about what information will be the most meaningful for your business.
Sole trader year ends
Some of the rules for sole traders around which profits get taxed in which tax year are a little complicated. The basic rule is that you will be taxed on the profits from your trading year that ended during the current tax year. If your trading year end is 30 June 2019, then for the 2019-2020 tax year you will be taxed on the profits for the year ended 30 June 2019, NOT on the profits for the year ending 5 April 2020 (assuming that this is your third year or more of trading).
The first couple of years of trading have more complicated rules. You can end up with something called “overlap profits” which you then carry forward until you stop 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.
If you don’t think your year end date fits well with your business you can always opt to change it.
What about for limited companies
Limited company year ends are set by Companies House, and the default is the end of the month of the anniversary of when your company was incorporated. You can choose to change your year end and either have a shorter trading period, or a longer one. You can only extend your year end once in 5 years though so choose carefully!
Do I have the right year end
Make sure you discuss the timing of your trading year end with your accountant to see what works best for your business.