FEDERAL INLAND REVENUE SERVICE
INFORMATION CIRCULAR | No.2006/05 |
Date of Publication | February, 2006 |
Subject: TAX IMPLICATION OF CHANGES IN ACCOUNTING DATES
This information circular is issued to provide direction to all Revenue Staff, Tax Practitioners, Consultants, Taxpayers and to the General Public on the tax implication of changes in a company’s accounting dates. It provides an opportunity for all Revenue Staff and tax consultants to avail themselves of the acceptable method of preparation of tax returns during years of change in accounting dates.
1.0.Introduction
Attention of Management has been drawn to the fact that different methods are being applied by tax consultants and Tax officers in the treatment of changes in accounting dates, with each method yielding different results in under-assessment or incorrect assessments levied on taxpayers. Management is aware of the cumbersome and lengthy methods discussed in FIRS taxation modules, which reinforces the need to simplify the calculations for the purpose of better understanding. It has therefore become imperative to issue this circular as a guide to officers who have responsibility for filing and assessment duties, and those who may be required, as a matter of duty to carry out preliminary review on tax returns submitted by companies as well as officers vested with audit responsibilities, who from time to time will come across cases of change in accounting dates in the course of their audit assignment.
2.0. Changes in Accounting Dates
There are a number of reasons why a business may wish to change its accounting date and these reasons may include:
- The need to synchronize the accounting date of a subsidiary with that of the holding company.
- The convenience of stock taking at a particular period of the year.
- A business may take over the operation of another and as a result wish to change the accounting date of the company taken over to that of its own.
Where a change in accounting date takes place, be it a sole trader, partnership or a limited liability company, the provisions of section 29(2) of the CITA CAP C21 LFN 2004 as amended will apply.The Actprovides that the Tax Authorities have the power to decide the basis ofcomputing the tax liability for the year in which the change occurs andthe two following years of assessment.
As should be expected, the tax official will base his decision on the best advantage to the Tax Authority. It is important to note that the three relevant years to be considered are:
- The assessment year in which the accounting date becomes different from the date of the earlier years. This is known as the year when the change occurs.
- The next two years of assessment following that in which the change occurs.
In practice, calculations are made on both the old dates and the new dates. The greater of these two aggregates will be the choice of the Tax Authority.
3.0. Years Involved in the Tax Computations
- Whenever a company change its accounting date, the company shall be assessed to tax through a special process of determining the basis of assessment. This process requires computations for three (3) relevant years. The three (3) years are: the assessment year in which the accounting date becomes different from the date of the earlier years. This is known as the year when the change occurs.
- The next two years of assessment following that in which the change occurs.
4.0. Assessment Procedure on Change of Accounting Date
For an on-going business, current assessment is based on preceding year basis. But whenever there is a change of accounting date, a normal accounting period may not have ended in the year of change. This is so because when there is a change of accounting date, it is either that an account is prepared for more than twelve months to the new accounting date or even less than twelve months to the new accounting year end. The Service will often adopt the following procedures to determine the assessments for the three relevant years.
- Identifying the first year in which the business has failed to make up the accounts to its usual accounting date.
- Identifying the two years immediately following the year of failure.
- Computing assessable profit for the three relevant years based on the old accounting date (on preceding year basis). iv) Computing assessable profit for the three relevant years based on the new accounting date (on preceding year basis).
- Adding up the assessable profits for the three years in (iii) and (iv) above separately.
- Selecting the higher of the two profits added up in (v) above.
5.0. Illustration with Worked Examples
Example 1
Julius Becker Nigeria Limited has been in business for many years. It has for a long time prepared its annual accounts up to 30thApril. In 1996, it decided to change its accounting date to 31stOctober. Available figures showed its adjusted profits as follows:
| (No. of Months) | ||
Year ended | 30/4/1995 | 450,000 | 12 |
Period ended | 31/10/1996 | 830,000 | 18 |
Year ended | 31/10/1997 | 590,000 | 12 |
Year ended | 31/10/1998 | 600,000 | 12 |
You are required to compute the correct assessments for all the relevant years in the light of the change in accounting date.
Solution
JULIUS BECKER NIGERIA LIMITED
COMPUTATION OF ASSESSMENT
Note: The last account submitted before the change was 30thApril 1995. Therefore, the year of change is 1996. The three relevant years are therefore 1996, 1997 and 1998.
- Original Assessments (Based on old Accounting date of 30th
April)
Year of Assmt. Basis Period Assessment
N
- P:Y.B(1/5/94-30/4/95) 450,000
- 1/5/95 – 30/4/96
12/18 x 830,000 553,333
- 1/5/96 – 30/4/97
(6/18 x 830,000) + (6/12 x 590,000) 571,667
- Assessment Based on 31stOctober
Year of Assmt. Basis Period Assessment
N
- 1/11/94 – 31/10/95
(1/11/94-30/4/95) + (1/5/95-31/10/95)
(6/12 x 450,000) + 6/18 x 830,000) 501,667
- P.Y.B. to 31/10/96
1/11/95 – 31/10/96
12/18 x 830,000 553,333
- P.Y.B. to 31/10/97 590,000
- Summary of Assessments
Year Old date of New date of
30thApril 31stOctober
N N
- 450,000 501,667
- 553,333 553,333
- 571,667 590,000
1,575,000 1,645,000
Conclusion:
The tax authority will choose to raise assessments on the basis of the new accounting date as it results in higher assessment.
Example 2
Sammy Limited decided in 2003 to change its accounting date to 31stJuly each year, having kept its accounts to 31stOctober for several years. An examination of its books showed the following adjusted profits:
| ||
Year ended | 31st October 2001 | 25,000 12 |
Year ended | 31st October 2002 | 18,000 12 |
Period ended | 31st July 2003 | 20,000 9 |
Year ended | 31st July 2004 | 28,000 12 |
Year ended | 31st July 2005 | 19,000 12 |
You are required to prepare the relevant computations for all the years of assessment.
Solution
The last account was made up to 31stOctober 2002. Therefore, the year of change is 2003 and the relevant years are 2003, 2004 and 2005.
- Normal Assessment (Base on old Accounting date of 31stOctober)
Year of Assmt. Basis Period Assessment
N
- P.Y.B to 31/10/02 18,000
- 1/11/02 – 31/10/03
(1/11/02-31/7/03)+(1/8/03-31/10/03)
20,000 + 3/12 x 28,000 27,000
- 1/11/03 – 31/10/04
(1/11/03 – 31/7/04) + (1/8/04-31/10/04)
9/12 x 28,000 + 3/12 x 19,000 25,750
- Assessment based (on new accounting date of 31stJuly)
Year of Assmt. Basis Period Assessment
N
- 1/8/01 – 31/7/2002
(1/8/01–31/10/01) + (1/11/01-31/7/02)
3/12 x 25,000 + 9/12 x 18,000 19,750
- 1/8/02 – 31/7/03
(1/8/02-31/10/02) + (1/11/01-31/7/03)
3/12 x 18,000 + 20,000 24,500
- 1/8/03 – 31/7/04 28,000
- Summary of Assessments
Year Old Accounting New Accounting
Date Date
N N
- 18,000 19,750
- 27,000 24,500
- 25,750 28,000
70,750 72,250
Conclusion:
The Revenue Authority will raise assessments based on the new date as the aggregate of this is higher than that of the old date basis.
6.0. Conclusion
Tax officers should be guided by the content of this Circular and adhere to procedures specified in the Circular for the computation of assessable profit whenever company change its accounting date.
7.0 Enquiries
All enquiries in connection with this Information Circular should be addressed to:
Executive Chairman,
Federal Inland Revenue Service
Revenue House,
15 Sokode Crescent, Wuse Zone 5, Abuja.
Or
Visit our website: www.firs.gov.ng
Email: enquiries@firs.gov.ng
Telephones: 08159490002, 08159490001, 08159490000