As a sole trader you will prepare a set of accounts for your business and use these as the basis for your tax return. The tax year for individuals always runs from April 6 one year, to April 5 the following year, but you select your own annual accounting date for the business.
What should I consider when selecting a year-end:
• It should be convenient for you:
If you have stock, you don’t want to be doing your stock take at your busiest time of year. Picking a date when stock is usually at a lower level will make it easier to count. You may also not want to be closing your books and working on your accounts at your busiest time of year.
It maybe customary for your trade to use a certain year-end which you would like to keep in sync with.
Opening year rules
When you commence trade there are special opening year rules for the first three years, to make sure you are assessed for tax in every year that your business trades.
John starts trading on January 1, 2020 and choosing December 31 as his year-end, prepares his first accounts to December 31, 2020. His first basis period is January 1, 2020 to April 5, 2020. In the 2019/20 tax year, John will be assessed on 3/12 of the profit from his first set of accounts.
For the 2020/21 tax year John will be assessed on the full profits from the accounts to December 31, 2020. John has been taxed twice for the first 3 months. This is known as overlap profit and can only be relieved when John stops trading.
Having April 5 as your year-end avoids overlap profits arising. Further special rules mean that selecting a year-end date between March 31 and April 5, will also avoid overlap profits.
Tonbridge Accountants can help you establish a year-end date that is suitable for the needs of you and your business.