Suppose you have had a very good year in your company, but things have slowed down since the year end. Can you save some tax by changing your accounting date?
If you prepare company accounts for longer than 12 months, the law requires you to split them into the first 12 months and the balance to work out the corporation tax. But you do the split of trading profits on a time basis, not on the actual time the profit was earned (some things are "actual", such as capital gains). This can have peculiar effects.
Suppose you actually made £400,000 in 12 months and just £50,000 in the next 6 months. The tax on those profits would be £89,750 and £9,500, totalling £99,250.
If you made £450,000 in an 18 month period, that would be divided up into profits of £300,000 and £150,000. The tax on that is £57,000 and £28,500, totalling £85,500. The difference is because profits are taxed at a higher rate if you are making over £300,000 a year. The time apportionment of the profits of the long period evens out the high profit and lowers the tax rate.
Spotting this opportunity requires some up-to-date management accounts. It's not something you want to do frequently, but it may make sense once in a while. It might also be worth shifting your year-end for other reasons, including the timing of tax payments and the ease or difficulty of preparing the accounts. We will be happy to discuss whether you have the best date for you.
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