I am a tax-return virgin, and could really do with some help!! I'm helping DP do 3 years of very overdue tax returns as I'm good with numbers and fairly handy with a spreadsheet. He was self-employed and as his work is seasonal he earned most of his money in the summer months.
As I understand it taxable income = profit - tax threshold - expenses
If this is true, then if we make the accounting year start in August, it splits some big invoices between the years, and makes the overall taxable amounts smaller. (We would stick to this for all years).
BUT I know that if you change the accounting period you have to do some kind of adjustment for the first year (and maybe the last)? It's this bit I don't understand.
Can anyone explain this to me?
Also, in general am I right in thinking you can save money by changing the accounting year in some cases?
Hiya strudelface thanks for your response That's not exactly what I mean. I think I left some vital info out (sorry I didn't mean to do this by stealth!)
My DP was only self-employed for 3 years - we only have to submit 3 years tax returns in total, he has stopped this business now. In year 1 and year 3 he didn't run the business for the whole year, and so didn't earn very much. He earned most in year 2.
If the accounts start in April, then for year 1 and 3, the income tax threshold hasn't actually been reached. The taxable amount for years 1 & 3 is zero, but there is a big bill for year 2.
However if we start the year in August instead, the income is more evenly split between the years, and the whole income tax threshold is being 'used' each year. The overall taxable amount is less in the second scenario.
This makes sense to me. However someone who knows much more about tax than me said I shouldn't do it this way, but was unwilling to explain why "because you won't understand" he said (this made me quite actually! I'm pretty smart! How does he know if I'll understand something or not if he doesn't even try to explain it?! ... but I digress )
Also I know you have to make some kind of adjustment if you change the accounting date. I don't understand how this works though and wonder if it will cancel out any gains made by changing the date.
I've been reading the annual return notes, and it looks like I need to go and learn about overlap periods, and basis periods. (anyone? )
I just wanted to know if I'm barking up the right tree really, or if actually it's not likely to save us any money and I should just stick to the standard year and save the hassle.
If anyone can help make sense of it I'd be very grateful (and I'd love to prove the patronising "you couldn't possibly understand" bloke wrong!)