This is a very important matter and needs to be carefully considered once you have commenced business. Your taxable profit will be based on a twelve month period ending in the tax year.
The tax year runs on a calendar year basis and each tax year ends on the 31st December.
You must choose an accounting date during the year to which you will make up your accounts e.g. 12 months to the end of December or 12 months to the end of January or 12 months to the end of February and so on.
The two most popular dates in the year tend to be the end of December or the end of April ( for historic reasons when the tax year used to end on the 5th April).
Accounts made up to end of December
This means your accounts will run in tandem with the tax yearend and most people use this date. This is particularly important for individuals who suffer substantial withholding tax on their earnings e.g. medical consultants, dentists, consultants providing services to Government Agencies etc.
You pay your tax in October each year based on your profits to end of December in that year e.g.
Accounts to end of December 2010 – Tax due October 2010
Accounts to end of December 2011 – Tax due October 2011
Accounts made up to end of April
After the initial start up rules you will be paying your tax each October based on your accounting profit to the end of April e.g.
Accounts to end of April 2010 – Tax due October 2010.
Accounts to end of April 2011 – Tax due October 2011.
The benefits of using an April accounting date are:
- In a start up situation when profits are likely to be low it defers the tax payment date for as long as possible, which helps cash flow.
- You have time to prepare your accounts before the tax is due for payment in October.
- As you will know your taxable profit for the year early in the year it gives you time to consider the making of investments to reduce your tax liability.
The choice of your first accounting date will be influenced by your anticipated profits and whether or not you suffer withholding tax on any of your earnings. Most small businesses take time to generate substantial profits. Assuming profits are likely to grow on a gradual basis and that you do not suffer any significant withholding tax, then the end of April is likely to be the optimum date for preparing your accounts for tax purposes.
Example Choosing Your First Accounting Date
For a Start up position:
Choice depends on
- Initial profitability
- If withholding tax due on income.
Assuming there is no withholding tax deducted lets look at the following example:
Started on 1st September 2009
|September December 2009||
|January December 2010||
|January December 2011||
Question What is the best accounting date to use for tax purposes?
Answer The first accounts should be prepared for the period from September 2009 to April 2011. Thereafter accounts should be prepared to April each year.
Question Why April as Compared to December?
Answer Lets answer this in reverse. If we had used December as the accounting date no profits arose for the first tax year, 20098. This means the tax credits for this period are lost together with the benefit of the lower (20%) tax rate.
For tax year 2010 tax would be payable based on profits of €20,000 and for tax year 2011 tax would be based on profits of €40,000.
By using April 2011 as the first accounting date the profits on which tax is based for the first three years i.e. tax years 2009, 2010 and 2011 amounts to €38,500. This compares to profits of €60,000 if a December yearend had been used.
Tax Saving by Using April 2011
Assume single person with no other income
|Using an Accounting Date in||December||January|
|Tax Due for Year 2009||
|Tax Due for Year 2010||
|Tax Due for Year 2011||
|Total Income Tax Due||
|The difference in tax payments is almost €12,000.|
You can see from this example the difference in tax payments for the first 3 tax years is significant with a very substantial tax saving achieved by using an April accounting date as compared to a December accounting date.
If you are starting a business and need advice on how to choose the most tax efficient accounting date we can provide same by way of consultation subject to an extra charge.