You’ve extended your company’s current accounting period to 18 months. This has the advantage of spreading the profit and the tax bill for a bumper year over a longer period, but how does it affect tax returns and payments?
Time for a change
There are many reasons for changing your company’s accounting period, e.g. alignment with companies in the same group. While it’s achieved simply by submitting a form to Companies House, the consequences can be significant for corporation tax (CT) purposes. These often catch people out, even accountants, and the result can be HMRC interest charges and even penalties.
The long and the short of it
HMRC must go along with a change of accounting date if it’s valid under company law. However, it imposes rules so that the change fits with the tax system and prevents avoidance. The key rule is that an accounting period for CT purposes cannot exceed twelve months, although it can be shorter. The consequences can be tricky.
Example – short period. Acom Ltd shortens its current accounting period from twelve months to 31 July 2019 to eight months to 31 March. It must pay any CT for the new shortened period no later than nine months and one day after 31 March 2019 and submit its tax return on or before 31 March 2020. Shortening an accounting period doesn’t usually cause problems with HMRC but lengthening a period may.
Example – long period. Bcom Ltd extends its current accounting period to end on 31 December 2019 instead of 30 June. Bcom must divide it into a twelve-month and a six-month period. The CT rules prescribe how this is done. Bcom’s first CT accounting period must be for twelve months (to 30 June 2019) and the second six months to 31 December 2019, and not the other way around. It must submit two CT returns, one for each period. However, what often catches people out is that the deadline for both returns is twelve months from the end of the new accounting date, e.g. for this example 31 December 2020.
Different dates
CT is usually payable no later than nine months and one day after the end of an accounting period, as illustrated in our first example above. You might therefore reasonably expect that in our second example the CT payment date would be 30 September 2020, i.e. nine months and one day after the new accounting date. And so it is for the CT payable for the six-month period to 31 December 2019, but not for the other period. The payment date for the twelve-month period is nine months and one day from the end of the period it covered, that is, 1 April 2020 which is long before you have to submit the corresponding tax return.
Trap. HMRC won’t send you reminders about paying a CT bill until you’ve submitted a return. You’ll be hit with an interest charge for late payment if you’re not aware of the quirky payment date rules.
Tip. To know what CT to pay (and so avoid an interest charge) where you extend an accounting period, prepare the corresponding accounts soon after the period ends. Where you significantly lengthen an accounting period, you’ll need to estimate the profit and pay the tax on that.