Whether trading as a sole trader, a partnership or a limited company, every business needs to have a period up to which it makes its accounts and other returns.
You may think that, as with your personal tax self-assessment returns, the Year End for your business must be April 5th. However, according to Carol Cheesman of Cheesmans Accountants this is not so.
There are some quite complex rules about the period of accounts that are reported in a tax return, but basically you can choose a Year End that is convenient to you; one that makes sense both commercially and fiscally.
The two most popular dates for a Year End are March 31st (as close as possible to April 5th) and December 31st (the end of the calendar year). But these dates don’t suit everyone.
For example, let’s imagine your business is selling Christmas trees.
You need to assess the level of stock that you are holding as at the Year End. This means counting it, valuing it, considering whether it is of a fair value etc.; it would be madness to choose a Year End when your stock is at its maximum. A Christmas tree seller would hope to have sold all of their stock by December 31st, but there’s all the accounting work to do to complete all the transactions that took place in the run up to Christmas and there could well be a lot of items that straddle the Christmas period, such as the receipt of final sales invoices and receipt of final purchase invoices.
If not December 31st, how about March 31st? Stocks of Christmas trees would be low then.
But if you’re a limited company, March 31st as a Year End may not be wise. This is because tax must be paid within nine months and one day of the Year End, which means, with a March 31st Year End, corporation tax has to be paid by January 1st the following year. Any personal tax bills (if you are not totally under PAYE) have to be paid by January 31st. That could squeeze your cash flow.
Around February/March (having collected any debtors from November/December tree sales), cash reserves should be at their peak, therefore it may be appropriate to choose a Year End requiring tax to be paid on April 1st; this would make the Year End June 30th. To check if this works as a date for a Year End, we need to answer yes to three questions:
· After this date, would stock levels be low? Yes.
· Would the period when accounts would be prepared (August/September) be relatively quiet? Yes.
· Would the tax payment date be good for cash flow? Yes.
You can see that by asking these questions of dates before and after June 30th, securing three yeses becomes more difficult: for example, a later date could drop Year End related accounting work into a busy trading period, and an earlier date may mean tax bills becoming due when new stock has to be purchased.
You need to ask these questions in relation to your business.
Of course there are other considerations too: One factor that could override all others considerations is whether the Year End date is used by everyone else in your industry – do you want to be out of sync when your competitors are comparing results?
Choosing a Year End that suits your particular business and/or industry is incredibly important. Get it wrong and it could merely create more work and stress, but, if you get it really wrong, it could also mean game over. What anyone about to embark on a new business or anyone already in business needs to do is seek out sound advice tailored to their individual business. Just think about those Christmas trees: they’re all different.