Help! Tax question - can I save tax by changing accounting year?

[lowrib]

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?

Any help would be much appreciated

TIA.

Oh Blimey lowrib, this could get quite complicated.

You say he has 3 years of returns to do? Did he submit a return before that, or has he never submitted a self-assessment return?

If he has never submitted a return, then you can, in effect, choose a date when his accounting period ended for the first year.

I suggest you start by taking a look at this document, scroll down to page 4, which explains how you work out what your accounting period should be.

Having said all that, you won't be able to change the accounting period now for past years.

On Page 6 of the document it says "One of the conditions for changing your basis period is that your Tax Return is
sent back by the relevant filing date. If you fail to do this, the change of
accounting date will not count for tax purposes."

That's because they know people will try to do what you have suggested.

If your DP never submitted a return before the first one that you are going to fill in, my suggestion would be that his first year accounts are made up to April 5, and carry on that way. That is much simpler from a tax point of view.

This page lists all the years for which you can download notes and helpsheets, scroll down within each year to get to the self employed pages, and read the notes carefully, as the rules tend to change subtley from year to year.

TBH I would suggest that this may be a professional job. May be worth seeing and accountant to get this done if he earned a half reasonable amount of money over those years.

clumsymum thanks I think it's starting to make a bit of sense! That helpsheet looks really useful, that'll be my homework for the weekend then .

Somehow I seem to have posted 2 identical threads on this not quite sure how that happened!

Here's what I posted on the other one

-----

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!)

In answer to your questions - no he hasn't posted a tax return before but he did inform them he was self employed. Therefore he has fines, but not as big as they could be .

The amounts we're talking about are relatively low so it's not worth employing a professional, I'd have to do it myself.

You say "Having said all that, you won't be able to change the accounting period now for past years.
On Page 6 of the document it says "One of the conditions for changing your basis period is that your Tax Return is
sent back by the relevant filing date. If you fail to do this, the change of
accounting date will not count for tax purposes."
That's because they know people will try to do what you have suggested."

I guess that means it's not worth trying to change the years then? I'm not at all surprised they've thought of that! But it was worth a try!

Hi again lowrib.

I understand your crossness with the guy who said "you won't understand". I hate gits like that.

From what you say then, it sounds like you may want to calculate his accounting years as ending in August for all 3 years.

I don't think there is any reason you shouldn't do that, and from your earlier post that would even out the taxable income.
But you can't use different accounting periods for the different years.

Good luck with it!