Julie Cameron discusses how the Rupert Grint case provides an important reminder of the care needed when making in a change of accounting date.
Poor Ron Weasley’s magic spells as a pupil of Hogwarts were notorious for failing, so perhaps it comes as no surprise that, back in the world of Muggles, actor Rupert Grint’s plan to save tax by changing his accounting date also foundered. In Rupert Grint v HMRC  UKUT 0028, the Upper Tribunal (UT) found the change was not effective.
Accounting period stretched
Grint changed his accounting date from 31 July 2009 to 5 April 2010, driven by the introduction of the additional income tax rate of 50% in 2010/11. This change would have resulted in eight months of profits falling back into 2009/10, where there was no additional rate, instead of into 2010/11.
Grint’s accountants filed his 2009/10 tax return on 31 January 2011, with two sets of self-employment pages: set one showed detail for the year ended 31 July 2009 (2009 schedule), set two presented figures for the period from 1 August 2009 to 5 April 2010 (2010 schedule), with the tax liability based on the aggregate of profits reported on the two schedules. The inference was that there had been two sets of accounts, corresponding to those from which the return had been prepared.
HMRC accepted Grint’s change of accounting date until a VAT visit uncovered another set of accounts, known as the “long accounts”. These covered the whole 20-month period from 1 August 2008 to 5 April 2010. HMRC opened an enquiry, in January 2012, which ended up before the FTT.
The FTT considered which of the many sets of figures could actually be regarded as accounts. This in itself reads like a bamboozlement spell.
The FTT first accepted the 20 month “long accounts” had been used to create the “2009 schedule” and “2010 schedule” accounts, corresponding with the tax return dates from which the two sets of self-employment pages had been prepared. Although these two sets of accounts were just time-apportioned versions of the figures in the long accounts, the FTT accepted that they counted as “accounts”.
The self-employment pages themselves became the 2009 and 2010 “tax return” accounts. The FTT rejected these, as merely being supplementary pages of the tax return.
Amazingly a new version of Grint’s accounts materialised after HMRC opened its enquiry in 2012.
These “new accounts” covered the same two periods as the “schedule” and “tax return” accounts, but differed from them as they were prepared on the accruals basis, rather than being created from a time apportionment exercise.
Although the FTT accepted that these new accounts satisfied the definition of “accounts”, they could not be relied on, having come into existence after the 2009/10 tax return was filed.
Baffling basis periods
The FTT was left with the “long accounts” and the “schedule accounts” as satisfying the definition of accounts.
It was found that, in accordance with ITTOIA 2005 ss 214-217, there had been the intended change of accounting date, but this was not sufficient for the change to be successful.
Grint needed to establish a basis period for 2009/10, and this turned on meeting the 18 month test for a ‘period of account’ as set out in the legislation.
The FTT found that only the long accounts reflected the performance of the business over the 20 months, and the period of account was by reference to these accounts. As the long accounts were drawn up for 20 months, they failed the 18 month test, so Grint had not established a basis period in 2009/10 ending on 5 April 2010.
Time turner – fast forward
The UT examined four grounds of appeal from the FTT decision.
Grounds 1 and 2
The FTT had found the long accounts, which had been presented to Grint at a meeting and used to discuss his financial performance, were the only accounts which truly reflected his performance over that period. The schedule accounts being merely a time-apportionment derived from the long accounts, did not reflect his performance in either the 12 months to July 2009 or the following eight months.
The UTT concurred with the FTT – there could only be one set of ‘accounts of the business’ and the long accounts satisfied the relevant criteria.
The UT considered and concurred with the FTT conclusion that the tax return accounts were not accounts. The supplementary pages of the tax return were not intended as a record of past transactions in a set period of time, but instead to return the taxpayer’s liability and there was no evidence to show that the return was signed or adopted by Grint as accounts rather than simply as his tax return.
Grint’s 2019/10 tax return was filed on 31 January 2011, and the new accounts were not in existence on that date, so these accounts could not be relied upon.
The UT agreed with the FTT that in order to establish a ’period of account’ for the purposes of the change of accounting date, the accounts “must actually be in existence when the tax return is filed”. If there was no such requirement, the test would become one which could not be failed, because the taxpayer would not need to have accounts covering the period when the notification is made, he could simply draw these up if asked to produce accounts.
No magic spell needed
Most accountants would concur that accounts are vital as an indicator of business performance, whilst also acknowledging that they are necessary for the determination of tax liability. Good practice dictates that the client’s accounts should be signed off before the tax return is filed.
Many businesses will never change their accounting date, but there are a dwindling number of sole traders who would benefit from doing so, to access transitional overlap relief (from 1996/97).
Wherever there is a change of accounting date, the 18-month rule (ITTOIA 2005 s 217(3)) applies. Avoid the temptation of time apportionment of a long set of accounts and instead prepare two sets guided by the new accounting date.
About Julie Cameron
Freelance chartered tax adviser and writer focussing on private client and tax adminsitration for individuals, I also volunteer for Bridge the Gap.