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How easy is it to change your year-end?

As we approach the implementation of HMRC’s basis period change, reforming how self-employed businesses are taxed, many LLPs and partnerships will want to change their financial year-end. Here Claire Watkins looks at what you need to do to implement the change and its impact.

HMRC’s basis period reform will mean that all self-employed businesses – so that’s all LLPs, partnerships and sole traders – will be taxed on profits earned in a tax year rather than on the profits of the accounting year (read more here). In practice, it means that a lot of LLPs and partnerships with a year-end other than 31 March or 5 April will want to change to 31 March so the tax year and their financial year are aligned. This raises the question of how easy or difficult it is to change your financial year-end. The main impact is on the timing of tax payments but there are other implications to be aware of including operational, rather than purely financial, ones.

About the author

Claire Watkins

+44 (0)20 7556 1482
watkinsc@buzzacott.co.uk

Shortening and lengthening the accounting period

From a purely regulatory perspective, an LLP can shorten its accounting period as often as it likes but can only extend it (up to a maximum of 18 months) once every five years. So if you’re a new business that incorporated and immediately extended its year-end to, say, 31 December, you might find you’re restricted to shortening it to 31 March rather than lengthening it to the following March. Also, be aware of the new deadline for filing your accounts at Companies House (in the case of an LLP) so there are no nasty surprises.

“Year-ending” your accounting software

If your accounting software is set up for a 12-month period to, for example, 30 April and you decide to shorten your year-end to 31 March, you’ll need to make sure you tailor your reporting function so it runs for 11 months rather than 12. Most software packages have this functionality but some struggle to accommodate an accounting period that is longer than 12 months. If you can’t extend your software to more than 12 months, you’ll need to run the year-end routine as normal (which rolls forward your retained profits, assets and liabilities to the new year) and then shorten the following period. Your accountant will be able to draw up your accounts by combining both sets of data but it is a more cumbersome process and you’ll need to make sure you take a back-up of all the required reports.

Changing your VAT quarters?

It’s not essential to make your VAT quarters align with the year-end but it can be helpful from an internal accounting perspective. With the approach of Making Tax Digital, the idea is that every quarter will align with the tax year quarters.

Holiday year, promotions and pay rises

Again, it’s not essential to change non-financial deadlines to match the new year-end but from an internal accounting perspective it can be helpful to change your staff holiday year-end. If you’re familiar with having to account for a holiday pay accrual, an aligned year-end is handy. On the other hand, timing promotions and pay rises so they coincide with the financial year-end can mean scrambling to get paperwork in order and notify employees at an already very busy time of year, so scheduling them to occur mid-financial year might be a good idea.

Impact on league tables and published data

The financial results of professional practices often appear in rankings or league tables for their sector. If one year your published results are for a period of less than 12 months – which could happen if you shorten your financial year-end – do make sure the published results acknowledge the fact.

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