Chapter 9 Change of Accounting Date

Question 1

9.1 Introduction

Answer 1

Special rules apply to calculate a trader’s taxable profits when they change their accounting date. These rules apply for unincorporated businesses only. A change in date will cause the accounts to not be 12 months, the current year basis cannot apply. The change of accounting date rules will not apply in the year the trader commences or the year in which the trade ceases. When considering the change in accounting date rules, the basis period will never be less than 12 months long and HMRC will always tax all profits.
To change your accounting period, you must meet all 3 conditions. The accounting period must not exceed 18 months, no change has been made in the previous 5 years or HMRC are satisfied the change is for bona fide commercial reasons and HMRC must be notified by 31 January following the end of the tax year or change. If conditions not meet HMRC ill use the old accounting date.

Question 2

9.2 The Four Stage Process

Answer 2

To calculate trading profits on a change of accounting date, we follow a four-step process.
• Identify the year of change
• Calculate taxable profits for all tax years either side of the change (12 months of profit up to the old accounts date and 12 months of profit up to the new accounts date)
• Identify the gap period, this is the period of profits which have not been taxed yet
• Tax the profits in the gap. If the gap exceeds 12 months, reduce the profits by using up an appropriate amount of overlap relief. If the gap is less than 12 months, tax an appropriate amount of profits from the previous period to make the gap up to 12 months. This will create overlap relief.
On a change of accounting date, you will either be using overlap relief or creating additional overlap relief.

Question 3

9.3 The year of Change

Answer 3

The year of change is the earlier of:
• The first tax year in which accounts are not drawn to the old date, or
• The first tax year in which accounts are drawn to the new date

Question 4

9.5 Conditions for a valid change of accounting date

Answer 4

The rules in this chapter will apply only where:
• The accounting period of change does not exceed 18 months, and
• The taxpayer informs HMRC of the change by 31 January following the tax year of change, and
• There has been no other change in the previous five tax years of the current change of date is for a bonda fide commercial reason
If a business changes its accounting date and breaches one of these conditions, HMRC will not recognize the change.