I pose this question because it is relevant for any company with falling profitability followed by losses.
By way of illustration I include an example using quarterly results for 30 months trading and I have for simplicity taken the taxable profit (per the tax return) to be the same as the accounting profit (per the accounts).
It is, however, important to acknowledge that the benefit of extending an accounting period depends entirely on the facts and that it will not work for a significant number of companies or groups of companies. Also if a company has extended its accounting period within the previous five years then it is prevented by Companies House from making an immediate and second extension. But after the expiry of five years a further extension can be made.
12 month accounting period
I include the financial results for a company with an annual December year end with commencement of losses in the final quarter of 2008. The results are as follows:
|12 Month Result||+ / –||12 Month Result||+ / –||6 Month Result||+ / –|
|Jan – March 2008||+30k||Jan – March 2009||-30k||Jan – March 2010||+10k|
|Apr – June 2008||+20k||Apr – June 2009||-15k||Apr – June 2010||+15k|
|July – Sept 2008||+15k||July – Sept 2009||+10k||Etc………|
|Oct – Dec 2008||-20k||Oct – Dec 2009||+15k|
Now unfortunately the tax of £9.5k owed on the £45k of profit for the 12 months to 31 December 2008 should be paid at the end of September 2009. A date which coincides very badly with the fortunes of the company as it has recently suffered losses of £65k and may be having cash flow problems.
If the £9.5k of tax is paid then the prompt filing of the tax return for the year ended 31 December 2009 would enable a refund of £4.2k to be received on the carry back of £20k of trade losses. Alternatively the company could delay making payment but would have to deal with the repercussions of the Revenue chasing tax.
By continuing with a December year end the tax payments are due, as follows:
|Accounting Period||Tax Payment Date||Tax Payable||Post-loss adjustment|
|Year Ended 31 December 2008||1 October 2009||£9,450||£5,250||Year Ended 31 December 2009||1 October 2010||(£4,200)||6 Months….[31 December 2010]||1 October 2011||£5,250||£5,250|
Extending the accounting period to 18 months
A company has up until the due date of submission of the accounts to Companies House to file a Form 225 with Companies House and extend the accounting period. In this example the cut off date is 31 October 2009.
Extending the accounting period by 6 months results is the following position:
|18 Month Result||+ / –||12 Month Result||+ / –|
|Jan – March 2008||+30k||July – Sept 2009||+10k|
|April – June 2008||+20k||Oct – Dec 2009||+15k|
|July – Sept 2008||+15k||Jan – March 2010||+10k|
|Oct – Dec 2008||-20k||Apr – June 2010||+15k|
|Jan – March 2009||-30k|
|April – June 2009||-15k|
And tax payments are due, as follows:
|Accounting Period||Tax Payment Date||Tax Payable|
|18 Month Ended 30 June 2009||1 October 2009 & 1 April 2010||£Nil||Year Ended 30 June 2010||1 April 2011||£10,500|
Therefore the extension of the accounting period has resulted in a six month delay in the payment of the £9.5k of tax that was originally due on 1 October 2009. Which is quite neat.
Timing is everything
The above example works because the financial result for the 12 months shows a profit while for the 18 month period it is exactly break even (i.e. £Nil). To understand whether you are in a similar position will require accurate information on your quarterly tax and accounting figures. So please beware of making any hasty changes.
Timing is everything
Continuing with the example then, you have turned cash flow positive and delayed the £9.5k tax payment, right? Well not entirely.
If the company had continued with a December year end the tax of £9.5k should have been paid but the loss arising in the later year would have created a £4.2k repayment. Therefore the tax paid on 24 months trading is £5.3k (that is 9.5k less 4.2k).
But it is now time to think about when tax is being paid on the six months profit of £25k arising between January to June 2010 because if the year end had remained 31 December then the due payment date on this profit would have been 1 October 2011. But as the year end has been altered the payment date has been pulled forward 6 months to 1 April 2011.
Is that bad? Well that depends very much on what the company cash flow position was around 1 October 2009.
This article is for discussion purposes only and does not represent advice on which you should act without consulting a professional as tax legislation is complex and changes frequently.