New company. Change year-end?

Should this company consider reducing it's first period of account?

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Hi all,

Trying to get my head around whether or not a new company client should consider shortening its first period of account.

Incorporated and commenced trading on 5/1/23. First period of account defaults to 31/1/24.

Profits for the period ended 31/3/23 will be £90K, then similarily £90K for the next three months when the current contract ends. Doesn't know if there will be any further income thereafter, so currently the profits for the period ended 31/1/24 are looking to be £180K. Apportionment of profits will tax almost three months of this at 19% (5/1/23 to 31/3/23), then the rest at the new CT marginal rates.

If the first period of account is shortened to 31/3/23, the first accounts will show profits of £90K, all taxed at 19%. The next accounts (y/e 31/3/24) will show profits of £90K, taxed at the new (higher) CT marginal rates.

Looks like taxable profits have shifted from a higher to a lower tax rate by shortening the period of account. Am I missing something?

Thanks.

Replies (12)

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RLI
By lionofludesch
11th Mar 2023 18:17

Yes - that the first period of account must be at least six months long (CA 2006, s391(5)).

Generally, if you think profits will fall, shorten the year end.

But if profits actually rise, the company will end up paying extra tax.

Personally, I'd do nothing for now. You don't have enough information to make this call at the moment. The company may take off bigstyle.

Thanks (0)
Replying to lionofludesch:
By Ruddles
11th Mar 2023 18:27

lionofludesch wrote:

Yes - that the first period of account must be at least six months long.


Although, rightly or wrongly (ie wrongly), CH will allow you to shorten it to less than 6 months.
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Replying to Ruddles:
RLI
By lionofludesch
11th Mar 2023 18:33

Ruddles wrote:

Although, rightly or wrongly (ie wrongly), CH will allow you to shorten it to less than 6 months.

It has happened, yes.

Doubt if HMRC would notice either.

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Replying to lionofludesch:
avatar
By JoeWilliamsEBS2
13th Mar 2023 07:52

s391(5) defines "the first accounting period". It doesn't prohibit any period being under 6 months long.

Compare the language used to s392(5) which sets the 18 month maximum length out clearly.

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Replying to JoeWilliamsEBS2:
By Ruddles
13th Mar 2023 09:07

“A company’s first accounting reference period is the period of more than six months …”

Pretty unambiguous, I would say.

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Replying to JoeWilliamsEBS2:
RLI
By lionofludesch
13th Mar 2023 09:34

JoeWilliamsEBS2 wrote:

s391(5) defines "the first accounting period". It doesn't prohibit any period being under 6 months long.

OK - well, it's an eccentric view and one I don't share.

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paddle steamer
By DJKL
11th Mar 2023 19:35

There is always cessation of trade at end of the current contract, that will certainly push more back pre 31.3.23 but might of course have ramifications re profit extraction via say wind up if then recommence with a Newco thereafter (new contract procured)

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Replying to DJKL:
RLI
By lionofludesch
11th Mar 2023 19:57

Depends - what if the new contract is more profitable than the old?

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avatar
By Catherine Newman
12th Mar 2023 08:24

I do it anyway to make the Accounting Periods conceptually easier with no time apportionment of Accounting Periods and have to account for a small number days to get to the Accounting Period end.

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Replying to Catherine Newman:
RLI
By lionofludesch
12th Mar 2023 08:42

Well, there's a question. As demonstrated here, choice of year end can affect the tax payable.

Would you choose a 31 March year end if it meant your client paying more tax?

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Replying to lionofludesch:
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By Catherine Newman
13th Mar 2023 08:31

Yes. You can't change the year end for 5 years so the start up period probably won't reflect what might happen in the future. That having been said I only have one limited company client with comparatively big profits.

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Replying to Catherine Newman:
RLI
By lionofludesch
13th Mar 2023 09:10

Catherine Newman wrote:

Yes. You can't change the year end for 5 years so the start up period probably won't reflect what might happen in the future. That having been said I only have one limited company client with comparatively big profits.

You can change the year end every year if you wish.

Thanks (1)