For those who are self-employed, the choice of accounting date can be crucial as it determines which profits are taxed twice and also the level of overlap relief available on cessation or a change of accounting date.
To simplify things, you may wish to choose an accounting date of either 31st March or 5th April as these dates coincide with the tax year, and will therefore eliminate any overlap profit.
By choosing a date other than the two specified above, some profits will be taxed twice in the early years. Such ‘overlap’ profits are carried forward until either the business changes its year end or ceases, when relief is given in the form of overlap relief.
Choosing a date early in the tax year will give the greatest lag between the end of the accounting period and the date on which the tax should be paid
Julia starts operating as a sole trader on the 1st January 2016. For 2015/16, she is assessed on actual profits from the 1st January 2016 till 5 April 2016. The profits on which she is assessed in the second year depend on her choice of accounting date.
By choosing an accounting date of 31st March, she will be taxed on actual profits up till 31st March. Therefore, only profits made between 1st and the 5th April will be taxed twice.
However, if she chooses an accounting date of the 31st December, in 2016/17 she will be taxed on the profits made from the year to 31st December 2016. As a result, any profits made from the 1st January 2016 to 5th April 2016 will be taxed in the previous year, 2015/16, and thus be taxed twice as overlap profits.