October 29th, 2012 / Insight posted in

Moving year-end to beat tax rise

IR writes: My business partners and I set up a small consultancy in 2004, which we run as a partnership. Profits have been growing steadily, so we have considered shortening our year-end from April 30 to March 31 next year before the new 50% income tax rate comes in on April 6. Is this a good strategy?

Traditionally, many partnerships set their year-ends as April 30 to delay the taxation of profits, says Chris Lane, a partner at Kingston Smith LLP. Currently the profits for the year ended April 30, 2009 form the basis period and will be taxed in the 2009-10 tax year. By changing the year-end to March 31, 2010, the actual profits for the 11 months to March 31, 2010 will be taxed in the 2009-10 tax year.

In addition, the profits for the period May 1, 2008 to April 30, 2009 will be taxed in the 2009-10 tax year, as these profits will not have been taxed yet. In other words, 23 months of profits will fall due to be taxed in the tax year 2009-2010.

When you started trading there would have been 11 months of profits used twice. This is known as overlap relief. When your trading period is the same as the tax year, these overlap profits can be used to cut your taxable profits. This means only 12 months of profits are taxed in the 2009-10 tax year.

Of course, as your profits have been growing, the original overlap profits are likely to be smaller than the current accounting profits. This means the total taxable profits in 2009-10 will be higher as a result of the change of year-end.

To determine whether it is in your interests to change your year-end, you will need to do the number work to verify the effect. By using March 31, in effect you bring forward the taxation of your profits, which therefore means the new 50% will only apply to later profits and you use your overlap relief. 
The downside is that for each accounting year from April 1, 2010, your profits will be taxed earlier.