20 April 2020
This blog considers the mismatch of timing for the self-employed between suppressed business performance and associated tax payments.
The self-employed are able to draw up accounts to any year end date they choose. In most cases, the tax charge for a given tax year is with reference to the profits of the 12 month accounting period ending during that tax year. That tax charge is then typically paid via advance payments on account, with a balancing payment made 31 January following the tax year end.
A large number of unincorporated businesses choose to draw accounts to either 31 March or 5 April each year, aligning their accounting year to the tax year. But many others work to 30 April, the popularity mainly resulting from the cash flow advantage of pushing tax bills as far beyond the end of the accounting year as is possible.
The position is best explained visually:
So whilst profits and cashflow are being squeezed today, the tax bills resulting from that squeeze won’t naturally fall due until 31 January 2022 and 31 July 2022. By contrast the potentially higher profits of better times are being taxed both this year and next.
What can be done?
- Forecasting
Both projecting your cashflow forward and bringing your most recent accounts up to date to understand upcoming tax bills. This needs to include any deferred VAT payments or July 2020 payment on account, as well as any money receivable under the Self-Employment Income Support Scheme (all COVID-19 relief measures).
- Losses
In some circumstances, losses from one year may be able to be carried back to an earlier year, reducing tax payments faster.
- Year end date
There may be profit smoothing advantages to considering a change in accounting year end, and there may be relief for overlap profits if the opening years of the trade were profitable ones.
- Business resilience
The suggestions above assume worsened trading performance but, of course, as a business owner you should also be considering the measures that can be put in place to make your business as resilient to these extraordinary times as possible with a view to weathering the storm.
To discuss how these issues may affect you, please get in touch with me or contact your usual UHY adviser.
