Accounting Period vs Tax Filing Period
The concept of “Accounting Period” is fairly easy to understand. Simply put, it’s the period for which you report your financials (i.e. annual financial statements). However, not many business owners fully understand how this relates to their tax filing period.
In general, the time period that your company’s tax return covers should align with your accounting period. This makes it easier to file your corporation taxes, because you can simply take the numbers from your annual financial statements and plug them into your tax return (subject to certain adjustments and add backs for tax purposes). However, there are some exceptions to this rule, and it’s important to know how this misalignment can occur so that you can ensure that your company is reporting for the correct periods. I will explain these exceptions in the following scenarios:
- First Year of Setting Up Company
One of the main scenarios when your accounting period may be different than the period covered by your tax return is in the first year that you set up your company. This happens because the period for corporation tax filing cannot be longer than 12 months per HMRC rules, but the period for annual financial statements filed with Companies House can be up to maximum 18-month period.
For example, let’s suppose that you set up your company on 1st August 2017 and you want your year-end to be 31st December (year-end date is also called “accounting reference date” for tax reporting purposes). You can then report 17-month financial statements to Companies House for the first year of operations from 1st August 2017 till 31st December 2018. However, for tax reporting, because the period for corporation tax filing cannot be longer than 12 months, you will have to file a tax return for the first 12-month period (1st August 2017–31st July 2018), and then file a second tax return for the remainder 5 months (1st August 2018–31st December 2018).
The good news is that after the initial year of setting up your company, the period for tax return should now be aligned with your accounting period (both for 1st January — 31st December).
2. Restarting a Dormant Company
The other scenario where the period covered by your tax return might be different from your accounting period is when your dormant company begins “trading” again. When this occurs, it’s important that you tell HMRC that your company is no longer dormant within 3 months of it starting to trade again. Then, comes the abundance of paper work you have to file:
- You need to submit financial statements to Companies House within 9 months of the company’s year-end date;
- Register for Corporation Tax again with the HMRC;
- Send a company tax return, including full statutory accounts to HMRC within 12 months of company’s year end, and;
- Pay any Corporation Tax due within 9 months and 1 day of the company’s year end.
For example, if you started trading again on 1st August 2017, but your year end is 30th October 2017. You will need to submit financial statements to Companies House for your usual financial year (1st November 2017–30th October 2018) for the first year since you restarted trading. However, for tax reporting, you will have to submit your financial statements and tax returns to the HMRC for the full period of 1st August 2017–30th October 2018. This will require you to file two tax returns, one for 1st August 2017–30thOctober 2017, then the regular annual return for 1st November 2017–30th October 2018. Therefore, when your business begins to trade again, there will most likely be a difference between the period covered by your tax return and your accounting period. Fortunately, this difference will correct itself by the second year when the two periods will align again.
3. Becoming a Dormant Company
In the exact opposite situation as scenario #2, if your company becomes dormant, there will also be a difference between the period covered by your tax return and your accounting period. First, unless you receive a letter from HMRC telling you that your company is determined to be dormant, you will need to tell HMRC that it’s dormant for Corporation Tax. If you have never received a “notice to deliver a Company Tax Return”, you can tell HMRC that your company became dormant over the phone or by post. If you have filed a Company Tax Return before or received a “notice to deliver a Company Tax Return”, then you will still need to file a company tax return online, which will show HMRC that your company is now dormant.
You will not need to pay Corporation Tax or file another Company Tax Return once you’ve told HMRC that your company is dormant (suggest you get a confirmation in writing from HMRC that they agree your company is dormant). However, you must still file annual financial statements and a confirmation statement with Companies House for that accounting period. The reporting requirements to Companies House will depend on if you are considered as a dormant company under their rules (Unfortunately, I’m sorry to tell you that the definition of “dormant company” for the HMRC and Companies House are slightly different). As a result, this will cause difference between your company’s tax filing period and accounting period.
Now that you know the various scenarios that may cause difference between period for tax filing vs. accounting period, the key is to check these periods for your company to make sure that after the initial difference, the two periods align again after this.
Lastly, remember that the deadline for filing your tax return is 12 months after the end of the accounting period it covers. The deadline to pay your corporate tax bill is 9 months and 1 day after the end of your accounting period (please note that this deadline is for small companies who don’t pay tax installments). NEVER miss a deadline, because there can be hefty penalty charges!