What Does the Term “Financial Year” Mean in Accounting
A financial year, also known as a fiscal year or a budget year, is a time period defined in government accounting. It’s frequently employed in the preparation of a country’s budget. In most cases, a country’s financial year does not correspond to the traditional calendar year. As a result, countries that use this system will often have taxation rules that require accounting records to be kept and maintained, as well as taxes to be calculated and assessed, in accordance with the government’s financial year.
The end of the financial year for a small business is important. Calculating tax on an annual basis is critical in direct taxes, particularly when collecting income tax from a population. Annual government fees, such as licence fees and council tax, will be charged in many places based on the fiscal year. This is also why a fiscal year is sometimes referred to as a tax year.
When does the financial year begin and end in the United Kingdom?
The UK tax year begins on April 6th of one year and ends on April 5th of the next year. For example, if the tax year begins on April 6, 2021, it will not end until April 5, 2022.
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The numerals of the calendar year it covers are frequently used to identify specific fiscal years. So, if you wanted to see the data for the above-mentioned year, you’d have to look for fiscal or tax year 2021/22. The following year would be 2022/23, and so forth.
What Is the Impact of the UK Financial Year on Businesses?
The fiscal year is used by corporations to disclose their financial results. This entails preparing yearly financial statements in order to measure the profitability of your firm over the course of the year, as well as for tax considerations, capital calculations, and other uses.
The fiscal year in the United Kingdom pertains to firms that operate as:
- Sole Traders
Individuals working for businesses are also affected by the fiscal year in this way, as most workers hired by businesses pay their income tax through PAYE (Pay as You Earn).
Because limited companies have a separate financial year than sole traders and partnerships, they are not included in this list. This financial year begins on the company’s “birthday” (the day it began trading, as defined once it was registered with Companies House) and ends the day before that date the following year.
A limited company’s financial year is normally the same as its accounting term for corporation tax purposes. This is the term during which the corporation must report, and it can be cut or lengthened a number of times over a five-year period.
Why is it important for business owners to understand the financial year?
It makes financial sense for you.
Your fiscal year begins on the date of your incorporation. Your financial year end date can be changed at any moment, and it might be longer than 12 months. In any situation, you should make a decision that makes sense for your organisation and is as consistent as possible. If you change your financial end date, it must remain the same for one year, so think about it carefully before doing so.
Accounting fees could be saved.
Another advantage of utilising a fiscal year is the possible cost reductions in accounting and auditing. Many organisations use the calendar year for accounting and auditing purposes in some fashion, so finding tax and accounting specialists or negotiating their costs in December may be challenging.
While the fiscal year in the United Kingdom is set and corporation tax is calculated based on it, a company can choose any year as its accounting year. This is a phase during which a firm or an individual gathers all of their financial records. Most organisations choose to operate their accounting year concurrently with their fiscal year to keep things simple.
How can I adjust the financial year-end of my firm in the United Kingdom?
You can adjust your company’s year-end (also known as the ‘accounting reference date’) to stretch your fiscal year for more than 12 months or shorten it for less than 12 months after reviewing the time frame that better matches with your business cycles. However, you can only do this for the current or previous financial year.
When your company’s fiscal year ends, your accounting deadlines shift as well.
The following are the rules:
1. You can reduce the length of your fiscal year as many times as you choose.
2. It must be reduced by at least one day.
3. The company’s financial year might be extended by up to 18 months once every five years at the most.
There is an exception to rule 3 if:
- Your business is in receivership.
- You’re synchronising your calendar with that of your subsidiary or parent company.
- The Companies House has given you specific authorization to do so.
You can apply for a date change online or by mail.