Change of accounting date and tax avoidance

Could HMRC challenge successive changes of company's accounting date as tax avoidance

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Does anyone have experience or views on whether HMRC might challenge successive changes in a company's accounting date as tax avoidance?

The background is briefly  as follows:

Client company owns and lets residential property and had 31 March year end for many years.

In anticipation of a large impending capital gain (dwarfing annual profits by a factor of 12 or more) it was decided last month to shorten the accounting period commencing 1 April 2022 to end on 31 August 2022. Companies House were duly notified, accounts for the period ended 31 August 2022 were filed to meet the 31/5/23 deadline and the corporation tax paid. We advised the company that without this measure the gain would be taxed at 25% (it is far above the small profits thresholds). With the change of AP there was a good chance of achieving a lower rate of tax provided that contracts were exchanged prior to 31 August 2023. The earlier payment of corporation tax for the p/e 30/9/22 was not an issue.

The capital gain is now imminent with the contract date anticipated to be 10 July 2023. 

Client has 3 main options:

1. Let current AP run full 12 months to 31 August 2023 - effective rate of tax =  21.6% (213 days at 19%; 153 days at 25%)

2. Shorten the current AP to end on 31 July 2023 - effective rate of tax = 21.185%  (213 days at 19%; 122 days at 25%) 

3. Shorten the current AP to end on 10 July 2023 - effective rate of tax = 20.93% (213 days at 19%; 101 days at 25%).

We are confident that the gain will be included in profits subject to corporation tax and then time apportioned to the financial years 2022 and 2023 rather than being allocated by specific date to the later financial year. However we are concerned that a midmonth year end such as 10 July, though perfectly legal, looks like obvious manipulation of the system. There is very little business case for any change other than the usual one of moving off the 31 March treadmill and also getting certainty over the quantum of the capital gain at the earliest possible date (there are valuation issues involved in ascertaining the base cost). However, if accounts are drawn up to 10/7/23 it is difficult to see how HMRC might challenge this.

 

Replies (9)

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By Rammstein1
29th Jun 2023 14:59

I thought that you could only change the year end once every 5 years without a good reason.

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Replying to Rammstein1:
By Ruddles
29th Jun 2023 15:13

A company may, under current rules, shorten as often as it wants. The 5-year restriction applies to lengthening only.

OP hasn't given any numbers but with a maximum saving of 0.67% is it really worth it? (For the record, I doubt that HMRC would even notice the change of accounting date and even if they did it is difficult to imagine under what provision they could challenge it.)

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Replying to Ruddles:
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By AndrewM627
29th Jun 2023 16:11

Thanks for the reality check.

I've already told the client that he's already had the best part of this particular meal, by bringing the effective tax rate down from 25% to nearer 21%. So, as you say, is the extra saving worth the candle? At 0.67% the tax saving is still several £000's, and the client has really got the bit between his teeth. He feels betrayed that the company tax rate was not brought down to 17% as promised several years ago, and that Kwarteng's proposed cancellation of Sunak's increase to 25% was subsequently reversed by Hunt. He bust a gut but failed (short of a last minute miracle) to get the sale contract over the line before the end of this month. We also spent a lot of time looking at a sub sale scenario in order to bring the company's sale date even further forward but decided that for a number of reasons it was too risky.

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Replying to AndrewM627:
By Ruddles
29th Jun 2023 16:42

Well, based on that it would seem that he is looking at a significant gain, never mind proceeds. Does he think that the 'reversal' of the 17% tax rate (and new 25% rate) applies only to his company? So I'd tell him to suck it up or make sure you charge him a decent fee for your time and efforts.

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Replying to Ruddles:
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By AndrewM627
29th Jun 2023 17:14

No, the client doesn't think that the reversal of the 17% etc applies only to his company, but I suspect he is kicking himself because he has delayed the sale in the hope of benefitting from a lower rate of tax. That of course proved to be a bad decision. But still a nice problem to have. Capital gain is over 85% of sale proceeds.

My fee will not be an issue.

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By Rgab1947
30th Jun 2023 11:13

The clue is in the question and example.

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By listerramjet
03rd Jul 2023 10:54

Apart from anything else tax avoidance is legal, and it is difficult to see how this could be interpreted as a scheme requiring registration.

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By Montrose
04th Jul 2023 15:15

A little bit of history. About 35 years ago I recommended a well known pop-star to change his accounting date to take advantage of transitional rules then applying, HMRC reaction? A belly laugh with the following comment " I know what you are doing"- and a happy client.

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Replying to Montrose:
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By AndrewM627
05th Jul 2023 16:43

Hi Montrose,
Thanks for sharing this. It makes me feel a lot better about the planned change of accounting date, and hopefully there will be another happy client.

It also occurred to me that when introducing changes in the corporation tax rate it would be a relatively simple matter for the legislature to countermand any tax advantage arising from a change in accounting date designed to take advantage of the transition. As it is, the legislature has chosen not to do so.

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