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Revision as of 16:41, 12 November 2006 by 172.209.118.157 (talk)(diff) ← Previous revision | Latest revision (diff) | Newer revision → (diff)An accounting period is a period with reference to which United Kingdom corporation tax is charged. 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 in turn below. The rule is that an accounting period ends on the earliest of the events listed below. An accounting period cannot last longer than 12 months. However, there is no minimum period of time for which an accounting period will last: in theory there can be one lasting just a nanosecond, or even only an instant.
After 12 months
An accounting period ends on the passing of 12 months from the beginning of the accounting period. Most companies prepare accounts for a 12 month period anyway, in which case this date is the same as the next one listed. However, if a company has an 18 month period of account (ie prepares accounts for an 18 month period), it will usually have one 12 month accounting period followed by a 6 month period.
The rule prevents the tax payment date being delayed indefinitely - particularly in the instance of an overseas company with a UK permanent establishment which is in a jurisdiction that does not require the preparation of accounts.
Some companies draw up their accounts for a 52, and in some years, 53 week period, for instance, if they want their accounts always to be drawn up to a particular day of the week. Under normal application of these rules, some years these companies will have a 52 week accounting period, and in others a 12 month accounting period followed by a short accounting period of up to 4 days. A company in this position can choose to treat these periods as though they are 12 month periods, except chargeable gains purposes, and for determining in which year capital allowances (tax depreciation) can be claimed.
Some retail co-operate societies prepare half-yearly or quarterly accounts. Without any concession they would have four accounting periods each year, with all the incumbent tax administration problems. Therefore there is a concession that such associations have 12 month accounting periods instead (subject to one of the other reasons for bringing an end to an accounting period occurring first).
An accounting date
An accounting period ends on an accounting date of a company or, if there is a period for which the company does not make up accounts, the end of that period. The accounting date of a company is the date to which it draws up accounts.
The first part of the rule is there because it makes a natural reference point for the tax computations - which apply to the profits of a period. The second part of the rule is there as it means that the next accounting period of the company can coincide with the period for which the company's accounts are drawn up to (subject to the other rules for bringing an end to an accounting period apply.
Beginning or ceasing to trade
An accounting period ends when a company begins or ceases to trade or to be, in respect of the trade or (if more than one) of all the trades carried on by it, within the charge to corporation tax.
Trading companies, which form the bulk of active companies, are taxed differently from all sorts of other company. In particular they can claim a deduction for expenses that are incurred wholly and exclusively for the purposes of the trade and which don't constitute capital expenditure. It is therefore appropriate to start a new accounting period when a company begins to trade (so that the trading profits computation has a convenient and sensiblle start date) and to end one when it ceases to trade.
Beginning or ceasing to be UK resident
Companies are within the charge to corporation tax if they are UK resident or if they trade through a permanent establishment within the UK and have income or gains chargeable to corporation tax. A UK resident company is charged to corporation tax on its worldwide profits. However, a non-UK resident company trading through a UK permanent establishment is charged to corporation tax only on the profits attributable to that permanent establishment.
It is therefore convenient for an accounting period to end if a company moves between those two statuses.
Ceasing to be within the charge
An accounting period ends when a company ceases to be within the charge to corporation tax. It is clearly convenient to end an accounting period from the date when the charge to corporation tax ceases. nnnnnnn
Winding up
An accounting period ends on the commencement of a winding up (in which case, thereafter an accounting period can only end on the expiration on 12 months or by the conclusion of the winding up. Once a company commences a winding up it is no longer in control of its directors, but instead of its liquidators. It will also stop trading. Special legal rules deal with how a winding up should proceed, and tax rules have been developed to deal with that circumstance. It is convenient, for these purposes, for an accounting period to end on winding up and only end on the expiry of 12 months or the conclusion of the winding up.
Transfer of life assurance business
An accounting period of a life assurer ends when it transfers some or all of its life assurance business to another company. Life assurance companies may write different types of business, such as Basic Life Assurance and General Annuity Business and Pension Business. The different types of business are taxed in different ways. To make the determination of how much investment return is allocated to each category of business easier, an accounting period ends when a company transfers some or all of its business to another company.
Reference
- Section 12 of the Income and Corporation Taxes Act 1988