It’s December. We’re approaching the end of another year – a clearly defined period with a beginning and an end because a year is a year, right? It has 12 months, 365 days, sometimes 366, or 52 weeks. So why would a financial year be anything different to that and what difference does it make from an accounting perspective?
In most cases, those numbers and that split is absolutely right. In fact, the overwhelming majority of companies will stick to this format and will typically have a financial year that mirrors either the calendar year (1st January to 31st December) or the tax year, (6th April to 5th April) or maybe just 1st April to 31st March – because 6th April is also an oddball, see below!
But there are a couple of scenarios whereby this is not the case and here’s why:
12 or 13 months?
Whilst according to the calendar, there are 12 named months, if one takes a month to be a standard measurement of 28 days or 4 weeks then there are actually 13 periods of 4 weeks in a year (13 x 4 = 52). As a result, if you want your accounting to be managed in clearly defined chunks of identical duration, you may opt to run a 13-month year. This is not uncommon and from a sales and results reporting perspective is used widely by a lot of organisations.
By working in this format, it is far easier to compare year on year results. Week 1 will always be comparable to week 1 and each four-week period will always have four lots of seven days – 4 lots of weekdays and 4 lots of weekends. As we know, a calendar month varies subject to the starting day of the year and therefore you end up with months of differing structure – some have more weekend days than others for instance. The impact is you are not always comparing apples with apples from a financial perspective. The 13-month format is also favoured by those with weekly payroll as it means no single period carries a greater payroll cost than the others.
If you want a well-known working example of the 13-month period, then you don’t need to look any further than our own government. For anyone in receipt of child benefits or a state pension (just two examples), these are managed on the 13-month format with a month being defined as 4 weeks, on a rolling basis. The result being there is traditionally one calendar month each year which sees two payments being received.
Changing your financial year
Your financial year is normally defined by the date on which you incorporate your business. If you incorporate in June, then your year end will be the 30th of June each year. This is of course, contrary to the statement above as not all businesses clearly align to the tax year or the calendar year from the beginning. But over time, there is normally justification for aligning to one or other of these traditional dates or even a 12-month period that is reflective of your industry – education for instance works on the academic year.
If you want to change your accounting year end, you are allowed to apply to have a longer or shorter year. The maximum you can extend to is 18 months, and likewise you can shorten the year – the minimum by which you can shorten the year is one day. You can’t change your company’s year-end when its accounts are overdue, however.
So, if you want to move your financial year end, it is possible to have a single financial year that is not 12 months in duration and can be anything from 6 to 18 months long. For comparison and analysis, it is best not to move your year end too many times as you will not have consistency in the reporting period.
Most accounting systems will happily manage a change in both the number of accounting periods in the year and the start and end dates of the financial year, as long as it is changed within the current year.
Why does the tax year start on 6th April?
The answer to this one is very simple. It finds its roots back in the 16th century and is ultimately to do with a combination of the move from the Julien (Julius Ceasar) calendar to the Gregorian calendar (Pope Gregory XIII), the sun, the world’s orbit and the Treasury’s insistence that it should always have a 365 day tax year – whether the year had 365 days in it or not – which of course every fourth year does not and neither did 1752, notable because it only had 354 days. See, very simple. Still not sure? No, and neither are we but let’s not move it – we just don’t need that right now.