How to Change Accounting Period in Your Business

Can you change accounting period from year to year? Understanding the intricacies of your company’s financial year and accounting period is a fundamental aspect of effective business management. These two concepts, while often used interchangeably, have distinct roles in the financial landscape of your business.

The term ‘accounting period’ is a crucial concept in the world of finance. It refers to the span of time in which financial information is being tracked and recorded. This period is typically a year, but it can also be a quarter or a month.

The financial year, often synonymous with the accounting period, holds significant importance in the business world. It’s a specific 12-month period during which a company’s financial activities are calculated and reported. This period is not necessarily aligned with the calendar year, and it’s often referred to as the ‘year end’.

The financial year is crucial as it forms the basis for a company’s tax calculations. It’s the period for which the company’s income and expenses are accounted for, and the resulting profit or loss is determined. This information is vital for tax purposes, as it helps determine the company’s tax liability.

Can you change the accounting period once you’ve started your business? Let’s find out. 

Interval vs External Considerations

Within your accounting system, you typically change periods at the end of each period to move on to the next. This is a standard accounting practice. But if you want to formally change your accounting period for tax filing or legal purposes (e.g., company year-end), there might be specific procedures and approvals required.

Here’s what to consider for an external change:

• Regulations:  Rules governing accounting period changes can vary depending on your location and business type.  Some allow more flexibility than others.
• Approval Process:  There might be a formal application process with relevant authorities (e.g., Companies House in UK) to get approval for a change.
• Impact on Tax Filing:  Changing your accounting period can affect tax filing deadlines. Be sure to understand the implications for your next tax filing.
• Shortening vs. Lengthening:  Generally, there are fewer restrictions on shortening your accounting period (e.g., starting your fiscal year earlier). Lengthening the period (e.g., extending your fiscal year) might have limitations (e.g., maximum of 18 months in some regions).

It’s important to consult with a professional accountant or tax advisor to understand the specific requirements in your situation. They can guide you through the process and ensure you’re following the proper procedures for changing your accounting period.

Benefits of Changing Your Accounting Year-End Date

Adjusting your accounting year-end date can offer a multitude of advantages for your business. From simplifying financial management to optimising tax liability, the benefits are worth considering.

This strategic move can be particularly beneficial for startups in their first year, providing a solid foundation for future financial planning.

Reducing Complexity and Tax Liability

One of the key benefits to changing your year-end is the potential to reduce complexity. By aligning your accounting year end with the end of the tax year, you can simplify your financial management.

This alignment can also help to minimise your tax liability. By timing your income and expenses to coincide with the end of the tax year, you can optimise your tax position.

In your first year of operation, this change can be particularly beneficial. It can provide a solid foundation for your financial management in the years to come.

Aligning with the Tax Year

Aligning your accounting year-end with the tax year can offer significant benefits. It simplifies the process of preparing your tax returns, as you’re dealing with a single, consistent timeframe.

This alignment can also help you better anticipate your tax liability. By having your accounting year coincide with the end of the tax year, you can more accurately estimate your tax obligations.

In your first year of making this change, you may find it a bit challenging. But, the long-term benefits to changing your year end will outweigh the initial complexities.

Rules and Regulations Around Changing Your Accounting Year-End Date

When it comes to changing your accounting year-end date, there are certain legal requirements that must be met. The first step is to notify HM Revenue and Customs (HMRC) of your intention to change your accounting date. This can be done online or by post, and must be completed within the tax year you wish to change.

The new accounting date must not result in an accounting period of more than 18 months. If it does, you may be required to pay corporation tax earlier than expected. It’s also important to note that you can only change your accounting date for the current tax year or the one before it, not for future tax years.

Potential Challenges and Solutions

Changing your accounting year-end date can present a few challenges. One of the main issues is the potential for a longer accounting period. This could lead to a higher corporation tax bill as you’ll be taxed on profits for a period longer than 12 months, for example.

Another challenge is the possibility of a shorter filing deadline. If you change your accounting date, you may find that your filing deadline is brought forward. This could put pressure on your business to prepare accounts and file them in a shorter timeframe.

However, these challenges can be overcome. By planning ahead and seeking professional advice, you can ensure a smooth transition to your new accounting date. It’s also worth noting that if you’re in your first accounting period, you have more flexibility to update your accounting period without these potential issues.

Final Thoughts on Changing Your Accounting Year-End Date

In conclusion, changing your accounting year-end date can be a strategic move for businesses, offering potential benefits such as reduced complexity and tax liability. However, it’s crucial to understand the rules and regulations surrounding this process, including the legal requirements and potential challenges.

Remember, the decision to change your accounting year-end date should be made with careful consideration and professional advice. It’s not a one-size-fits-all solution, and what works for one company may not work for another.

In the end, the goal is to choose an accounting period that aligns with your business operations and financial goals, ensuring a smooth and efficient accounting process.