A simple change to the accounting date for an unincorporated business can have a dramatic impact on the amount of tax due and the date it is payable.
Many sole trade or partnership businesses are likely to have suffered a fall in earnings in the last month or so, and the slowdown will impact their businesses for some time.
So, can they review their tax cost, beyond the help already being provided by government? For a normally profitable unincorporated business or partnership with a 31 March 2020 year end, there will be a significant tax bill in January 2021 because most of their year was profitable. Whilst they may not have to make the 31 July 2020 payment on account, it will still be payable on 31 January 2021.
However, the tax cost might be reduced by extending the most recent accounting period to, say, 18 months to include the current low-profit or loss-making period. The mechanics are not straightforward but assuming the six month period to 30 September 2020 is either generating a lower profit than before or is loss-making, potentially significant tax savings could be made. This is because the additional period can be amalgamated with the profitable 12-month period and the profits smoothed.
This is potentially better than carrying back a loss, as the personal allowances and lower rates could go unused if a loss claim is made.
Consider a self-employed chartered surveyor with taxable profit of £125,000 for the year to 31 March 2020. For the six months to September he makes a loss of £62,500. Changing the accounting date to 30 September could save £22,500 in tax for 2019/20.
There are two major benefits for our chartered surveyor. First, his payment due in January 2021 reduces by £18,100. Second, his overall tax liability for the two tax years as a result of the accounting date change reduces by £13,700.
If our chartered surveyor was a member of an Limited Liability Partnership with the same profitability profile, there will be a tax saving for every member of that LLP.
Every situation is different but, with many unincorporated businesses facing financial difficulties, it is certainly worth considering whether something as innocuous as an accounting date change could deliver a significant tax saving and immediate cash flow improvement.