I've just taken on a sole trader who runs his tax year october to october. I've not really come across this, most I've dealt with seem to run in line with the tax year. Are their any advantages or disadvantages to running as he does?
seems to be mostly disadvantages for sole traders. Although it very much depends on first year profits as to whether it's a serious disadvantage.
Take a look at basis periods for tax. They're a bit of a nightmare to explain but the issue really comes down to potential double taxation in the first year.
I did actually answer someone on a question about basis periods and gave a fuller response. When I've posted this I'll have a dig around to see if I can find it.
I know that you already know this Kris but for anyone else reading, the above response is not applicable to limited companies. The double taxation issue is peculiar to the self employed where they choose a business period other than the tax year.
back in a bit Kris,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Yeah peasie sorry, a long day, I do mean financial year. I'll have a look Shaun.
I assume that the financial year can be changed, and if so is it likely to cause major heartache. I can't for the life of me think why his previous accountant suggested it. A bit like most of the stuff he suggested!
Sometimes it can be accidental; the trade started in October, so lets just do a year. Other times it might be to exclude seasonal trade until the following year, which October could do, depending on the sector. Tim
When it comes to sole traders, all mine are year end 5th April. Even new clients who have just started will end on 5th April. On the SA Self Employment page, there is a box for when the period start and end periods of the accounts so if they start on 1st December, the period is 1st Dec to 5th April; then the 2nd year is a full year.
The thing I have noticed these days is that most no longer want nor require sole trader accounts and banks/lenders are perfectly happy with a copy of the tax return. It seems to be only Ltd companies thats have non-HMRC financial years.
He has been in business for hundreds of years (well, 40 odd), He's just moved to me. Similar to yourself David all my clients currently end their year on 31 March. I just was curious why he ended in October. I wondered if it was just a twist of fate or something more calculated.
I might suggest to him that we realign to the tax year. Is there any huge disadvantages to doing this? or is it better just to let it be?
In the current economic climate a lot of businesses are making losses and by having, say an October year end, the claim of losses can be accelerated.
Also an October 2010 year end will be taxed on the April 2011 Return so the tax will not be paid until January 2012, 15 months after the profit was made!
You also have to consider a lot of other issues when deciding your year end. For examply if you run a business that sells Easter Eggs you really don't want a 5th April year end as you would have a lot of stock to count for the end of the year. If your year end was September there would be no stock to worry about.
If you advise a client to have a 5th April year end just because it is easier for us to prepare a Tax Return or because you don't understand the rules surrounding overlap profits then you leave yourself open to loosing your client if they come across a professional that can adequately advise them.
If you advise a client to have a 5th April year end just because it is easier for us to prepare a Tax Return or because you don't understand the rules surrounding overlap profits then you leave yourself open to loosing your client if they come across a professional that can adequately advise them.
There lies a little problem then with the overlap of bookkeeping and accountancy. This is a bookkeeping forum sometimes frequented by accountants. Some bookkeepers do the completion of tax returns. But ICB members for instance are not allowed to offer tax advice. I don't really see how you can complete a tax return without offering some kind of tax advice.
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Never buy black socks from a normal shop. They shaft you every time.
Peasie I totally agree, in preparing a Tax Return for a client there will be areas that require judgement and therefore you are giving advice.
However it is down to the client to decide for themselves on the level of advice they want. As long as a bookkeeper explains to the client that they are not a tax expert I don't see what harm there can be in it.
I would have thought two things. Firstly, there would be Transitional Overlap Relief (TOR) brought forward on last years return (in box 67 currently). Dont assume that he shouldnt hold this relief just because there is nothing in that box (my software forgot to carry it forward in 2010),
Secondly, I assume you would be preparing an 18 month set of accounts.
By all means someone correct me if Ive forgotten the nuances of this procedure but basically, you would deduct the TOR from the 18 months profit. In other words, if the 6 months to 5th April contains profits that are higher than the TOR, then the client would pay more tax.
In addition, you are supposed to have a genuinely commercial reason for changing the year end although I have never been challenged by HMRC.
Advice is all about telling people what to do, it's easy enough not to advise but still offer a full service. You can give customers options, providing them with information for them to then make decisions about.
So whilst a tax advisor might say "You should pay yourself a salary of £589 per month to reduce your tax liability....", an alternative non-advice conversation would involve suggesting an salary as an option, explaining why it's worth considering (alongside the pros and cons of all the various options) and answering whatever questions the client had. But then the client would decide what to do, with no advice being given.
It's an enabling pproach, one which increases client knowledge and understanding and encourages them to take responsibility for their own decisions, so it's a model that is about a way of working, not just avoiding giving advice to meet regulatory or insurance requirements!
Thank you Ruth, this is a big help. It is something I had been considering and it is good to get another point of view. I have no wish to advice anyone or make their decisions for them - it is hard enough making my own decisions!
The non 5 April/31 March year ends used to be more popular pre self assessment. These days, as mentioned, it tends to be more trouble than it's worth.
If there's no transitional profits, the last tax bill when they finish can effectively be based on up to 2 years profit, so it can be larger than usual. Kris, you probably need to be aware of the consequences just in case (when!) your client ceases.
As I mentioned earlier more trouble for who? I agree at the start and end there are issues to be aware of but in the current economic climate it needs careful consideration.
I trade as a Limited company but if I were to trade as a sole trader I would have a 30th April year end. By doing this my profit for the current year 30/04/12 would be assesed on my 05/04/13 tax return and tax paid by 31/01/14 giving me 18 months to pay my tax.
There is no 'right' answer the only advice I would give is you need to do whats right for your client not what makes your life as a bookkeeper/accountant easier.
