When you start a business, whether it’s via a company or sole trade, you can choose when your first financial (accounting) period will end. Tax and company
law place limitations on companies but for unincorporated businesses the choice is more flexible. HMRC encourages unincorporated businesses to opt
for an accounting period that coincides with the end of the tax year. This makes life simpler but is not necessarily tax efficient.
Over the life of a business you’ll be taxed on the profits your business makes. However, the year in which the profits are taxed can vary depending on
your choice of accounting date. There’s no single right answer, as different accounting dates suit different situations.
Example. You started a business on 1 May 2017 and prepared your first accounts for up to 5 April 2018. These showed a loss of £6,000. In the next year,
2018/19, you made a profit of £5,200. You estimate your profits for 2019/20 will be £30,000. For tax purposes losses for which no special tax relief
is claimed reduce future taxable profits. Therefore, £5,200 of the £6,000 loss is used to reduce the taxable profit to £0 for 2018/19. Because you
had no other income in 2018/19 you would not have paid tax on the £5,200 profit even ignoring the losses as your tax-free personal allowance (£11,850)
would have covered them. You’ve therefore wasted some of the losses on income that would have been tax free anyway.
Loss relief must be claimed within 20 months of the end of the tax year in which the losses occurred. As that was the tax year ended on 5 April 2018 you
needed to have filed a claim with HMRC by 31 January 2020. Despite missing the time limit your can recover some of the wasted loss.
Retrospectively changing your accounting dates can alter which tax year profits are assessed. There are conditions and time limits but they allow for a
great deal of flexibility in the first three years of a business.
You are entitled to amend your tax return for 2019/20 so that the accounting period for that year ends twelve months from the start of the business, i.e.
30 April 2018. Your accounts for the period 6 April 2018 to 30 April 2018 show a profit of just £120. So for the twelve months from the start of your
business to 30 April 2018 your accounts show a loss of £5,880 (£120 profit plus the £6,000 loss from 1 May 2017 to 5 April 2018). Your taxable profit
for 2018/19 is therefore £0 and you have only used £120 of your loss - the remaining £5,880 can be carried forward and used to reduce your taxable
profits for 2019/20, which you know will be around £30,000.
Time limits apply but you can change your mind about the date on which your accounting period should end even after you’ve sent the figures to HMRC. This
can change the amount of profit taxable for a year which means there’s some scope for retrospective tax planning.