By now you may be aware that from 1st April 2023 the main rate of corporation tax increased from 19% to 25%. For companies whose accounting periods straddle 1st April, the corporation tax for that period will be applied at a blended rate. This has raised a question of whether businesses could have saved on tax if their accounting periods had ended on or before 31st March.
Have you considered whether changing your accounting period could save tax? In this week’s Tax Tuesday, we discuss the rules surrounding shortening and extending your company’s financial year, and how it could benefit you.
What are the rules?
There are different rules, depending on whether you are shortening or extending your accounting period. You can shorten your company’s financial year as often as you like, and the minimum period that you can shorten it is by one day. Lengthening, however, is more complicated. You can only extend your accounting period once every five years and the maximum that you can extend it by when you do so is 18 months. This can be longer if your company is in administration.
There are some circumstances under which you can extend your financial year more frequently and these are if:
- the company is in administration
- you’re aligning periods with a subsidiary or parent company
- you have special permission from Companies House.
It’s important to note that you cannot change your company’s year-end if its accounts are overdue!
How could your company benefit?
If the changes to corporation tax occurred part-way through your accounting period then, as we mentioned, a hybrid rate of the previous 19% tax and new 25% tax will be applied to your taxable profits.
If your company had a large profit before 1st April, you would effectively be subject to a higher rate of tax than when the profit was made. Shortening your accounting period to end on 31st March would mean that the chargeable gain would be taxable at 19%, rather than the higher hybrid rate that you otherwise would’ve been subject to. Although this will change your tax payment dates and require further planning ahead, you may benefit from significant tax savings as a result.
Similarly, you may be presented with an opportunity to make savings from an extended accounting period, based on a similar premise. If your company has a December year end, and makes a large gain in May 2023, you could benefit from extending the previous accounting period to May 2023 (should you be allowed based on the rules above). This would be valuable as approximately one month of your tax year would be subject to the 25% rate, rather than half of the year if you kept it the same.
How can we help?
At Harold Sharp, our tax planning team can confidently advise on whether a shift in accounting periods would benefit your company. If you would like to find out more, or enquire about whether you would benefit from a year-end change, then please do not hesitate to get in touch at tax@haroldsharp.co.uk or call 0161 905 1616.