If you run your business as a limited company and your year end is approaching you may want to consider extending that year end. All businesses are going to be affected by the impact of the Coronavirus and many will see, what we hope will be, only a temporary downturn in their trading.
HMRC have said that they will extend payment deadlines for paying taxes including corporation tax, but it might be suitable for some corporate businesses to extend their year end from say March to September so that the next set of accounts will include the lean months from April to September. This will automatically reduce those profits in the 18 months to 30th September and therefore the resulting corporation tax bill will be lower.
For example, if an accounting period is extended to 18 months ie a twelve month period plus a six month period then two corporation tax computations are required. If a company made £100,000 profit in the first twelve months, but then went on to make a loss of £50,000 in the next six months then the combined result is a profit of £50,000 for the eighteen months.
The first twelve months is two thirds of the total so the taxable profit for that period is £33,333 which at 19% is £6,333 corporation tax payable nine months and a day from the original unextended year end. The tax on the final third of the profits for the six month period would be calculated on the remaining profits of £16,667 at 19% is £3,167 payable six months after the first payment.
So, whilst losses can be carried back if the year end were not extended then the company would pay £19,000 nine months after the original year end rather than only £6,333. Then the company would have to wait until its next year end, when it would have made a loss, to carry back that loss and get a refund from HMRC. Ultimately the end result will be the same but the cash actually paid out in the meanwhile is significantly less with the extended accounting period.
Some businesses may have bank borrowings that require an annual set of accounts, but, in these exceptionally difficult times, banks may well be content with a twelve month set of management accounts to be followed by an eighteen month statutory set of accounts. Ie the twelve month set plus a further six months.