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Amending accounting periods to get earlier tax relief

Stewart Brandon

One obvious effect of the current situation is that businesses of all types (not just companies) are likely to be loss-making or at the very least have significantly reduced profits. Where these businesses have profits in the most recently completed period there are likely to be significant tax liabilities. For those businesses where there are no restrictions on changing the accounting period end (such as being part of a corporate group which doesn’t want to alter across numerous entities) it may be worth changing it (generally by extending); this will bring the loss-making period into the same accounting period as that with profits.
As a simple example of a limited company:
Company X Limited makes a taxable profit of £600,000 for the year ended 31 December 2019. It then makes a loss of £300,000 in the 6 months to 30 June 2020.
If year-end is unchanged Corporation Tax of £114,000 will be due by 1 October 2020. If the current year to 31 December 2020 is loss-making it should be able to carry that loss back and get a refund for tax paid in 2020  in 2021.
If year-end is extended to the 18 months to 30 June 2020 then there is a now a long period with a profit of £300,000 (ie £600k profit minus £300k loss). This profit  is then time apportioned into 2 taxable basis periods as these cannot exceed 12 months. The profit for the 12 months to 31 December 2019 is now £200,000 (£300,000 X 12/18months) and tax of only £38,000 will be due by 1 October 2020 (compared to £114,000 at the same date if no change made).Please remember, however,  that if the company year-end has previously been extended in the past five years it will generally not be possible to make the current period longer.
For businesses structured in ways other than as a Limited Company (such as sole traders or partnerships) there are also  potential benefits to cash flow (although the Government agreeing to defer self-assessment payments mitigates some of this).

More consideration is required however as changing the accounting period end will affect overlap relief. Overlap profit/loss arises as both a partnership tax return and an individual’s tax return calculate tax on the basis of a 12 month period meaning a proportion of a long accounting period will be included in a different tax year. This changing of year ends can cause a spike in tax at a future date when the overlap is crystallised if profits are much higher than they are during the period when the overlap arises. Each situation has to be considered separately as an individual’s tax liability can be affected by many factors outside of their business.

Please note-the profits subject to tax over time will be identical but the cashflow impact is to delay the payment due in the short-term. At the date of writing HMRC have not made any statement on deferral of corporation tax liabilities although they have highlighted the time to pay arrangements
Please contact your local Moore (South) office if you would like to review your current position and to potentially assist with the process of changing period-end.