A business associate recently told you that his accountant changed his financial account period in order to delay tax liability. Is this something worth considering for your company?
We’ve previously explained that altering the length of an accounting period won’t change the dates when income tax is due on business profits but can change the amount of tax payable. However, that’s the position for income tax; accounting periods for corporation tax (CT) are subject to very different rules.
Before you can consider the CT consequences of altering the accounting date you need to check that it’s permitted by company law. This only allows you to change the date to which you prepare your accounts, known as the accounting reference date (ARD), if the deadline for submission hasn’t passed (normally nine months from the ARD). Further rules mean that you can shorten the year as many times as you like but can only lengthen it to a maximum of 18 months once every five years.
CT due date
If you successfully change your company’s ARD, it’s automatically effective for CT purposes and this can change the date on which the tax on profits is payable. CT is payable nine months and a day after the ARD but only if the new accounting period is for a year or less. A change of ARD can therefore accelerate the due date for CT but not delay it.
CT accounting periods
Confusingly, when HMRC talks about accounting periods it’s referring to CT accounting periods which can differ from actual accounting periods if the latter is for longer than a year.
While the tricky CT rules prevent companies delaying CT payments by changing their accounting date, there can still be a tax advantage. For example, where a director or shareholder borrows or increases their borrowing from the company. Bringing forward the ARD to a date when the borrowing was at a lower level reduces the amount of CT the company might otherwise have to pay.
While you can extend your company’s accounting period so that it lasts up to 18 months, corporation tax periods can’t be longer than a year. This means you can’t delay the due date for payment of tax. However, there can be tax advantages to changing an accounting period, e.g. where you start or increase borrowing from your company.