Choosing a suitable year end

Your year end or accounting date is the date to which your accounts are usually made up. You should choose this within a few months of commencing trading. Many businesses set this to 31/3 (or 5/4) to tie in with the tax year (ending 5/4) but many retailers choose 31/12 to tie in with the calendar year and to better fit the typical retail trading cycle. Your first set of accounts, made up to this date, are unlikely to be for exactly one year but more likely from 6 to 18 months. Subsequent accounts will be for exactly 12 months until you cease trading or change your year end.
Choosing a year end that coincides with the tax year, called fiscal accounting, significantly reduces the complexity of calculating tax, especially for the first few years of trading. It can however mean that you pay tax earlier at a time in your business lifecycle when cash flow is tight but it minimises your overlap liability. This is where you are taxed on the same profits twice but can claim overlap relief when your business ceases trading or you change your year end. So what you lose in short term cash flow you gain in the medium term by minimising overlap profits. Overlap relief is not an interest paying account so if you intend to be in business for a while, it may not be worth much when you finally get to redeem it! Also delaying that first tax payment results in you never being up to date with your tax liabilities which could lead to a nasty surprise in a later year or when the business ceases. This approach requires you to estimate your tax liability on an ongoing basis.
Over the entire life cycle of your business, choice of year end does not affect how much tax you actually pay because tax is paid on all profits once and only once. However it can affect when and how much tax you pay in those crucial, first few years of trading so it makes sense to have a good strategy in place to determine the best year end for your business at this germinal time in its existence.
In summary I’d say that setting your year end to 31/3 is the simplest approach. HMRC will accept 31/3 as coincident with the end of the tax year on 5/4. Also being at the end of the month it simplifies creating year end summary reports for getting totals for your tax return eg most accountancy software runs on a monthly basis.

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