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bigduckontax
bigduckontax, Accountant
Category: Tax
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Experience:  FCCA FCMA CGMA ACIS
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What are allowable/reasonable commercial reasons change

Customer Question

What are allowable/reasonable commercial reasons for a change of accounting date?
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I am Keith one of the experts on Just Answer and pleased to be able to help you with your question. Gov UK web site has the following guidance: 'The rules on changing your financial year endYou can shorten your company’s financial year as many times as you like - the minimum period you can shorten it by is 1 day.You can lengthen your company’s financial year:to a maximum of 18 months, or longer if your company’s in administrationonce every 5 yearsYou can only lengthen the financial year more often than every 5 years if:the company is in administrationyou’re aligning dates with a subsidiary or parent companyyou have special permission from Companies House'Other than those restrictions there are no 'allowable or reasonable commercial reasons' for a change; it is entirely up to the directors of the organization's discretion. I do hope that my reply has been of assistance to you.
Expert:  bigduckontax replied 2 years ago.

For individual traders the decision is very much tied up with the tax position. Tax Cafe has the following guidance:

'It’s even easier for sole traders to change their accounting date, as they don’t need to tell Companies House. The consequences of the change can be much more complex, however – but extremely beneficial in some cases.

The sole trader simply draws up accounts to their new accounting date and puts this date on their Tax Return. For the new date to be effective for tax purposes the Tax Return must be submitted on time and the new accounting period must not exceed eighteen months. Unless the change is made for commercial reasons, there must not have been another earlier change in the previous five tax years.

Your taxable profit for the year in which the change takes place depends on the length of your accounting period and on when your new accounting date falls.

If you’ve shortened your accounting period, you will have either one or two accounting dates falling in the tax year. If just one accounting date falls in the tax year, you will be taxed on your profits for the period of twelve months ending on your new accounting date. This means that part of your profits for the previous accounting period will be taxed twice. Any profit which is taxed twice is known as an ‘overlap profit’. This also frequently occurs when you start a new business.

Relief for your ‘overlap profit’ is given when you cease trading, or sometimes on a subsequent change of accounting date. We’ll come on to that in a minute.

It may seem like a bad idea to be taxed on the same profit twice, but sometimes you can generate future overlap relief, which could later save you tax at 42% or even more, without paying any extra tax now.'

I personally have seen overlap relief applied very quickly, but in my personal case I had to wait until I went out of that particular business.