Accounting period (UK taxation)

Last updated

An accounting period is a period with reference to which United Kingdom corporation tax is charged. [1] It helps dictate when tax is paid on income and gains. An accounting period begins whenever a company comes within the corporation tax charge, and whenever an accounting period ends without the company ceasing to be within the charge. There are a number of rules about when an accounting period ends, and we look at each of these below.

Contents

Often an accounting period coincides with a company's period of account. This is the period for which it draws up accounts, [2] except for a life assurance company, where it is the period for which it draws up its periodical return. [3] However, periods of account and accounting periods do not necessarily coincide.

Basic rules

An accounting period begins when: [4]

An accounting period ends on the earliest of the following: [11]

There are further rules to deal with windings up, life assurance companies and lessor companies.

A UK-resident company is treated as coming within the charge to corporation tax (if it has not already come within the charge to corporation tax) when it commences to carry on business. [6]

Example

Suppose ABC Ltd, a UK resident company is incorporated on 1 August 20X1. It acquires a source of income (an interest-bearing bank account) on 1 September 20X1 and commences trading on 1 October 20X1 and continues trading throughout all other periods under review. It draws up its accounts for the following periods:

1 August 20X1 to 31 December 20X1
1 January 20X2 to 31 December 20X2
1 January 20X3 to 30 June 20X3
1 July 20X3 to 31 December 20X4

Then ABC Ltd would have the following accounting periods:

1 September 20X1 to 30 September 20X1 (from when it came into charge to corporation tax to the commencement of trade)
1 October 20X1 to 31 December 20X1 (to the end of a period of account)
1 January 20X2 to 31 December 20X2 (to the end of a period of account)
1 January 20X3 to 30 June 20X3 (to the end of a period of account)
1 July 20X3 to 30 June 20X4 (to the expiry of 12 months)
1 July 20X4 to 31 December 20X4 (to the end of a period of account)

Company with more than one trade

If a company carrying on more than one trade draws up accounts of any of them to different dates, and does not make up general accounts for the whole of the company's activities, the company may determine that any one of those dates shall be taken into consideration for the purposes of determining whether an accounting period has ended under the rule in the second bullet point above. [12]

If, however, the Board of HMRC is of the opinion, on reasonable grounds, that the date so chosen by the company is inappropriate, they may, if it is reasonable to do so, give notice that the accounting date of another of the company's trades should be used instead. [13]

Mean accounting date

Some companies draw up financial statements to the same day of the week, a Sunday, say, each year. They will therefore have 364-day (52-week) or 371-day (53-week) periods of account. As long as the company draws its accounts up to within four days of a mean accounting date each year, it may, for the purposes of determining its accounting periods, deem its accounts to be drawn up for a twelve-month period. For example, when there is a 371-day period of account, instead of having one accounting period of 365 days (in a non-leap year) and another of 6 days, it will prepare its return on the assumption that the period of account was 365 days long. [14]

This method is related to the 4–4–5 calendar of accounts, where a quarter is deemed to comprise two months of 4 weeks each and one month of 5 weeks, a total of 13 weeks or 91 days. In the United States the method is referred to as the 52–53 Week Fiscal Year and is approved for use under US Generally Accepted Accounting Principles (GAAP) and the Internal Revenue Code. See article under 4–4–5 calendar for discussion of the US method application.

Inspector determining the accounting period

Where it appears to the tax inspector that the beginning or end of any accounting period is uncertain, he may make an assessment on the company for such period, not exceeding 12 months, as appears to him appropriate. In that event, that period is treated for all purposes as an accounting period unless the inspector sees fit to revise it as a result of receiving further facts, or on an appeal against the assessment in respect of some other matter the company shows the true accounting periods. If on an appeal against an assessment made under this rule the company shows the true accounting periods, the assessment appealed against has effect as an assessment or assessments for the true accounting periods, and assessments may be made for any such periods as might have been made at the time when the assessment appealed against was made. [15]

Administration and winding up

Administration

An accounting period ends immediately before the day a company enters into administration. For this purpose a company enters administration when it enters administration under Schedule B1 to the Insolvency Act 1986 or is subject to any corresponding procedure otherwise than under that Act (for example, in an overseas jurisdiction). [16]

An accounting period ends when a company ceases to be in administration. [17] For these purposes a company ceases to be in administration when it ceases to be in administration under Schedule B1 to the Insolvency Act 1986 or any corresponding event occurs otherwise than under that Act [18] (for example, in an overseas jurisdiction).

Winding up

An accounting period ends and a new one begins with the commencement of a winding up. For this purpose a winding up is taken to commence on the passing of a resolution for the winding up of the company, or on the presentation of a winding up petition if no such resolution has previously been passed and a winding up order is made on the petition, or on the doing of any other act for a like purpose in the case of a winding up otherwise than under the Insolvency Act 1986. [19]

After this, an accounting period does not end other than by the expiration of 12 months from its beginning or by the completion of the winding up. [19] However, if the company later enters administration, this rule is disapplied from that point (and with an accounting period ending because the company has entered into administration). [16]

During the course of a winding up, a company may make an estimate of when it will be wound up so that it can prepare tax returns for its final accounting period before that period ends. If the date assumed for the winding up turns out to be before the actual winding up, then an accounting period ends on the date assumed for the winding up, a new accounting period starts, and the immediately preceding paragraph applies as if the winding up had started with that accounting period. [20]

Cooperatives preparing quarterly and half-yearly accounts

HMRC will, under certain conditions, allow cooperatives that prepare quarterly and half-yearly accounts to merge a number of periods of account for tax purposes so that they have only accounting date each year. [21]

Life assurance companies

Additionally, there are special rules that apply to life assurance companies from which life assurance business is transferred under an insurance business transfer scheme. Different rules apply depending on whether section 444AA of the Income and Corporation Taxes Act 1988 applies. For transfers before 1 January 2007, s444AA applies where the whole of the transferor's long-term insurance business is being transferred and the company. It is proposed that the Finance Bill 2007 will amend this for transfers on or after 1 January, so that section 444AA applies where the whole or substantially the whole of the transferor's long-term insurance business is transferred, in which case the transfer time is taken to be the time some business is first transferred/ [22]

If section 444AA does not apply, an accounting period of the transferor company ends with the day of the transfer. [23]

If section 444AA applies, an accounting period of the transferor company ends immediately before the transfer, and the transferor also has an accounting period covering the instant of the transfer (except for the purposes of calculating the equalisation provision for tax purposes). [24]

Example where s444AA applies

Suppose a transferor company, XYZ Life Ltd, has in the past prepared periodical returns for a period encompassing the calendar year. It transfers the whole of its business at 11.59pm on 31 December 20X1, after which it retains some cash on deposit. It agrees with the Financial Services Authority that it does not need to prepare a periodical return for 20X1.

XYZ Life Ltd will have the following accounting periods in 20X1:

1 January 20X1 to immediately before the transfer of business
An accounting period covering the instant of the transfer (11.59pm on 31 December 20X1)
An accounting period covering the period beginning immediately after the transfer to midnight on 31 December 20X1

Lessor companies

If a company carries on a business of leasing plant or machinery, is within the charge to corporation tax in respect of the business and there is a qualifying change of ownership in relation to the company, then an accounting period of the company ends on the day of that qualifying change in ownership, and a new accounting period begins on the following day. There are exceptions to this in Paragraph 40. [25]

Partial deeming provisions

Other provisions in the Taxes Acts sometimes deem there to be accounting periods for specific purposes only. This is typically on the introduction of new legislation. For example, when section 75 of the Income and Corporation Taxes Act 1988 was replaced as a result of the Finance Act 2004, companies, if necessary, deemed themselves to have an accounting period ending on 31 March 2004 for the purposes of calculating management expenses that they were entitled to under the rules applying pre-1 April 2004 and post-31 March 2004.

Notes

  1. ↑ Section 12 of the Income and Corporation Taxes Act 1988
  2. ↑ Section 832(1) of the Income and Corporation Taxes Act 1988
  3. ↑ Section 431 of the Income and Corporation Taxes Act 1988
  4. ↑ Section 12(2) of the Income and Corporation Taxes Act 1988
  5. ↑ Section 832(1) of the Income and Corporation Taxes Act 1988 (see the closing words) and HM Revenue and Customs' Company Taxation Manual at CTM01410
  6. 1 2 Section 12(4) of the Income and Corporation Taxes Act 1988
  7. ↑ Section 11 of the Income and Corporation Taxes Act 1988
  8. ↑ It was also held in Walker v Centaur Clothes Group Ltd 72 TC 379 that a source is not always necessary. In that case, it was held that the company becoming liable to pay advance corporation tax was enough to bring it within the charge to tax.
  9. ↑ Section 12(6) of the Income and Corporation Taxes Act 1988
  10. ↑ The full definition of what constitutes a chargeable gain or allowable loss is in the Taxation of Chargeable Gains Act 1992
  11. ↑ Section 12(3) of the Income and Corporation Taxes Act 1988
  12. ↑ Section 12(5) of the Income and Corporation Taxes Act 1988
  13. ↑ Section 12(5A) of the Income and Corporation Taxes Act 1988
  14. ↑ See the Institute of Chartered Accountants in England and Wales's Technical Release 500 and HM Revenue and Customs' Company Taxation Manual at CTM01560.
  15. ↑ Section 12(8) of the Income and Corporation Taxes Act 1988
  16. 1 2 Section 12(7ZA) of the Income and Corporation Taxes Act 1988
  17. ↑ Section 12(3)(da) of the Income and Corporation Taxes Act 1988
  18. ↑ Section 12(5B) of the Income and Corporation Taxes Act 1988
  19. 1 2 Section 12(7) of the Income and Corporation Taxes Act 1988
  20. ↑ Section 342(6) of the Income and Corporation Taxes Act 1988
  21. ↑ Inland Revenue Extra-statutory concession C12 See page 67 of this pdf from HM Revenue and Customs (772k)
  22. ↑ See draft legislation released by HMRC on 6 December 2006 Archived December 30, 2006, at the Wayback Machine
  23. ↑ Section 12(7A) of the Income and Corporation Taxes Act 1988
  24. ↑ Section 12(7C) of the Income and Corporation Taxes Act 1988
  25. ↑ Paragraphs 3, 33, 40 Schedule 10 to the Finance Act 2006

Related Research Articles

A tax deduction is an amount deducted from taxable income, usually based on expenses such as those incurred to produce additional income. Tax deductions are a form of tax incentives, along with exemptions and tax credits. The difference between deductions, exemptions, and credits is that deductions and exemptions both reduce taxable income, while credits reduce tax.

A capital gains tax (CGT) is the tax on profits realized on the sale of a non-inventory asset. The most common capital gains are realized from the sale of stocks, bonds, precious metals, real estate, and property.

<span class="mw-page-title-main">United Kingdom corporation tax</span> UK tax on UK-resident companies and companies with permanent establishments in the UK

Corporation tax in the United Kingdom is a corporate tax levied in on the profits made by UK-resident companies and on the profits of entities registered overseas with permanent establishments in the UK.

In Canada, taxation is a prerogative shared between the federal government and the various provincial and territorial legislatures.

Controlled foreign corporation (CFC) rules are features of an income tax system designed to limit artificial deferral of tax by using offshore low taxed entities. The rules are needed only with respect to income of an entity that is not currently taxed to the owners of the entity. Generally, certain classes of taxpayers must include in their income currently certain amounts earned by foreign entities they or related persons control.

<span class="mw-page-title-main">Taxation in the United Kingdom</span> United Kingdom tax codes

In the United Kingdom, taxation may involve payments to at least three different levels of government: central government, devolved governments and local government. Central government revenues come primarily from income tax, National Insurance contributions, value added tax, corporation tax and fuel duty. Local government revenues come primarily from grants from central government funds, business rates in England, Council Tax and increasingly from fees and charges such as those for on-street parking. In the fiscal year 2014–15, total government revenue was forecast to be £648 billion, or 37.7 per cent of GDP, with net taxes and National Insurance contributions standing at £606 billion.

A corporate tax, also called corporation tax or company tax, is a type of direct tax levied on the income or capital of corporations and other similar legal entities. The tax is usually imposed at the national level, but it may also be imposed at state or local levels in some countries. Corporate taxes may be referred to as income tax or capital tax, depending on the nature of the tax.

The schedular system of taxation is the system of how the charge to United Kingdom corporation tax is applied. It also applied to United Kingdom income tax before legislation was rewritten by the Tax Law Rewrite Project. Similar systems apply in other jurisdictions that are or were closely related to the United Kingdom, such as Ireland and Jersey.

<span class="mw-page-title-main">Taxation in the Republic of Ireland</span> Irish tax code

Taxation in Ireland in 2017 came from Personal Income taxes, and Consumption taxes, being VAT and Excise and Customs duties. Corporation taxes represents most of the balance, but Ireland's Corporate Tax System (CT) is a central part of Ireland's economic model. Ireland summarises its taxation policy using the OECD's Hierarchy of Taxes pyramid, which emphasises high corporate tax rates as the most harmful types of taxes where economic growth is the objective. The balance of Ireland's taxes are Property taxes and Capital taxes.

<span class="mw-page-title-main">Inheritance tax in the United Kingdom</span> United Kingdom legislation

In the United Kingdom, inheritance tax is a transfer tax. It was introduced with effect from 18 March 1986, replacing capital transfer tax. The UK has the fourth highest inheritance tax rate in the world, according to conservative think tank, the Tax Foundation, though only a very small proportion of the population pays it. 3.7% of deaths recorded in the UK in the 2020-21 tax year resulted in inheritance tax liabilities. Other countries such as China, Russia and India have no inheritance tax, whilst Australia, New Zealand, Canada, Norway and Israel have all chosen to abolish succession taxes.

<span class="mw-page-title-main">Income and Corporation Taxes Act 1988</span> United Kingdom legislation

The Income and Corporation Taxes Act 1988, also known as ICTA, was the foremost United Kingdom Act of Parliament concerned with taxation until the Income Tax Act 2007 and the Corporation Tax Act 2010. ICTA was enacted in order to consolidate a number of earlier legislative provisions covering taxation. Originally, ICTA primarily covered income tax and corporation tax. It is the longest Act of Parliament to have ever been written.

<span class="mw-page-title-main">Deferred tax</span>

Deferred tax is a notional asset or liability to reflect corporate income taxation on a basis that is the same or more similar to recognition of profits than the taxation treatment. Deferred tax liabilities can arise as a result of corporate taxation treatment of capital expenditure being more rapid than the accounting depreciation treatment. Deferred tax assets can arise due to net loss carry-overs, which are only recorded as asset if it is deemed more likely than not that the asset will be used in future fiscal periods. Different countries may also allow or require discounting of the assets or particularly liabilities. There are often disclosure requirements for potential liabilities and assets that are not actually recognised as an asset or liability.

<span class="mw-page-title-main">Salaries tax</span>

Salaries tax is a type of income tax that is levied in Hong Kong, chargeable on income from any office, employment and pension for a year of assessment arising in or derived from the territory. For purposes of calculating liability, the period of assessment is from April 1 to March 31 of the following year.

In Hong Kong, profits tax is an income tax chargeable to business carried on in Hong Kong. Applying the territorial taxation concept, only profits sourced in Hong Kong are taxable in general. Capital gains are not taxable in Hong Kong, although it is always arguable whether an income is capital in nature.

<span class="mw-page-title-main">Fiscal year</span> One-year term for government and business financial reporting

A fiscal year is used in government accounting, which varies between countries, and for budget purposes. It is also used for financial reporting by businesses and other organizations. Laws in many jurisdictions require company financial reports to be prepared and published on an annual basis but generally with the reporting period not aligning with the calendar year. Taxation laws generally require accounting records to be maintained and taxes calculated on an annual basis, which usually corresponds to the fiscal year used for government purposes. The calculation of tax on an annual basis is especially relevant for direct taxes, such as income tax. Many annual government fees—such as council tax and license fees, are also levied on a fiscal year basis, but others are charged on an anniversary basis.

A foreign tax credit (FTC) is generally offered by income tax systems that tax residents on worldwide income, to mitigate the potential for double taxation. The credit may also be granted in those systems taxing residents on income that may have been taxed in another jurisdiction. The credit generally applies only to taxes of a nature similar to the tax being reduced by the credit and is often limited to the amount of tax attributable to foreign source income. The limitation may be computed by country, class of income, overall, and/or another manner.

<span class="mw-page-title-main">Corporation Tax Act 2010</span> United Kingdom legislation

The Corporation Tax Act 2010 (c.4) is an Act of the Parliament of the United Kingdom that received Royal Assent on 3 March 2010.

Taxes in Germany are levied by the federal government, the states (Länder) as well as the municipalities (Städte/Gemeinden). Many direct and indirect taxes exist in Germany; income tax and VAT are the most significant.

Australian insolvency law regulates the position of companies which are in financial distress and are unable to pay or provide for all of their debts or other obligations, and matters ancillary to and arising from financial distress. The law in this area is principally governed by the Corporations Act 2001. Under Australian law, the term insolvency is usually used with reference to companies, and bankruptcy is used in relation to individuals. Insolvency law in Australia tries to seek an equitable balance between the competing interests of debtors, creditors and the wider community when debtors are unable to meet their financial obligations. The aim of the legislative provisions is to provide:

The history of inheritance taxes in the United Kingdom has undergone significant change and mutation since their original introduction in 1694.

References

This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.