Kevin Read looks at some hazards to avoid for a sole trader changing accounting date in the tax year 2023/24.
In a previous article, I discussed some of the issues arising from changing accounting date to 5 April before the new ‘tax year’ basis of assessment comes in for 2024/25. Below, I expand on these matters with a practical case study.
Case study: Laura the golfing plumber
Laura is a self-employed plumber and keen golfer. Her annual profits before capital allowances are £59,000, which accrue at a rate of £2,000 per month from April to August (when she plays a lot of golf) and £7,000 per month for the other seven months of the year. She has negligible other income.
She has a December year end, and in the transition year to the new basis of assessment (2023/24), Laura decides to change her accounting date to 31 March (which the new rules allow to be treated as a 5 April year end, thus avoiding the need for ongoing apportionment of profits from two different accounting periods each tax year). She has £3,000 of overlap profits being carried forward from commencement of trade.
(a) Drive and chip
If she makes up two separate sets of accounts, her results will be:
- year end 31 December 2023: £59,000;
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3 months to 31 March 2024: ((3 x £7,000) - £3,000) = £18,000.
The latter are ‘transition profits’, which do not count as adjusted net income for personal allowances abatement nor high income child benefit charge (HICBC) purposes. They are subject to automatic spreading over five years starting in 2023/24 so that only £3,600 will be taxable in 2023/24, in addition to the £59,000 from the standard basis period.
Suppose Laura spends £15,000 on a new van during the 15 months and claims annual investment allowance (AIA). If the van is bought in the 12-month period, the standard basis period profits will reduce to £44,000. She may therefore want to elect out of the full spreading to bring more transition profits into charge and use up her basic rate band. It will also save her being subject to the HICBC if she has any qualifying children.
If, instead, the van is purchased in the three months to 31 March 2024, the AIA will reduce the transition profits to £3,000 and the standard basis period profits will be unaffected. Thus, she will have reduced the profits that are being spread, so it is clearly beneficial to buy the van in the preceding 12-month period.
(b) Using her long game
What would happen if, instead, Laura changed her accounting date by making up a 15-month set of accounts to 31 March 2024?
In this situation, the profits after capital allowances are time-apportioned to get a split of the standard basis period profits and the transition profits. The profits after capital allowances (£59,000 + £21,000 - £15,000 = £65,000) are therefore split as follows:
- Standard basis period: £65,000 x 365/456 days = £52,028
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Transition basis period: £65,000 x 91/456 days = £12,972.
The overlap profits are deducted from the transition basis period to give transition profits of £9,972, which will be spread over five years. Thus, her assessable profits for 2023/24 will be £52,028 plus £1,994 = £54,022. She remains a higher rate taxpayer (despite her purchase of the van) and may be subject to the HICBC based on her adjusted net income of £52,028.
Practical tip
Any good golfer will decide their strategy in advance of a hole. Similarly, these accounting date issues need to be considered before capital expenditure is incurred and before the accounts are signed off. In Rupert Grint v HMRC [2019] UKUT 0028, it was confirmed both that the actual accounts cannot be substituted by different ones for tax purposes and that a set of accounts exceeding eighteen months is ineffective for change of accounting date purposes.
