October 29th, 2012 / Insight posted in

Change of year end will hit tax

DP writes: The accounts of our partnership are prepared to March 31 each year, but this date presents practical difficulties and we would prefer to use June 30 as our year end. What would be the tax implications of such a switch?

There should be no problem in changing the partnership’s year end to June 30, provided there has been no previous change of year end in the past five years, writes Jon Sutcliffe, partner at Kingston Smith LLP. However, a change of year end will lead to part of the profits being taxed twice, while creating an equivalent amount of overlap relief for future use. With a March 31 year end, the profits of that year will be treated as the taxable profits for the tax year to 5 April. With a June 30 year end, the accounts ending in any particular tax year will form the basis of that year’s taxable profits.

So, if you had a year end of March 31, 2011 and then change to June 30, 2012, the 2010-11 taxable profits will come from the March 2011 accounts. The 2011-12 and 2012-13 figures will both be based on a 12 month proportion of the June 30, 2012 accounts, typically calculated on a simple time apportionment basis, although a more exact basis may be used if there are monthly figures available in the 15 month accounting period. This means that 24 months of profits are calculated for the two tax years from what is only a 15 month accounting period. The nine months of profit that is effectively taxed twice is then available as overlap relief, which can be deducted on the retirement of each partner, or at a future change of year end. 

Ultimately, all the profits will be taxed once only, but timing could lead to significant differences, especially where there are fluctuating profits. It is worth looking at detailed calculations based on actual and projected profits to consider when is likely to be the best time to change.