UAE Financial Year: Choose Your Accounting Cycle Correctly

Does your financial year’s end coincide with your business’s busiest period? As a financial year ends, your accounting team must close books and prepare Corporate Tax returns. Certain businesses may even be required to prepare audited financial statements. It will have no bandwidth to effectively support your sales and operations with invoicing and working capital financing.

If you are facing such issues, there might be a remedy for your business. In the UAE, you can apply to change your financial year.

In this article, we will discuss the meaning of a financial year, key considerations for choosing your financial year, how to change your financial year, conditions for changing your financial year, why you must choose your financial year carefully, and accounting responsibilities you must manage at the end of your financial year.

What is the financial year in the UAE?

Like most tax jurisdictions in the world, the UAE allows businesses to choose their tax year. The default financial year for UAE businesses is the Gregorian calendar year. However, you can choose a different financial year so that tax reporting obligations do not clash with seasonal peaks and other compliance obligations. This minimizes the chances of reporting errors arising out of an overworked accounting function.

People often confuse financial years, fiscal years, and tax periods as synonyms, but they can refer to different periods.

1. Financial Year

Your company’s financial year is its accounting period. It defines the date on which books are opened and the date on which books are closed, and the periods for which annual financial statements will be prepared. In the UAE, businesses must follow the International Financial Reporting Standards (IFRS) or IFRS for SMEs (if they qualify) when preparing financial statements.

2. Fiscal Year

The fiscal year is the government’s budget period. It starts on 1st January and ends on 31st December. Currently, the UAE government prepares multi-year budgets. Recently, the government approved a budget of AED 292.5 billion for 2027-2029.

3. Tax Period

Your deadline for filing Corporate Tax returns and tax liability calculations is based on your tax period.

The FTA has clarified that the financial period followed by the taxable person under Commercial Companies Law shall be accepted as the tax period for Corporate Tax purposes. Furthermore, if the first tax period of such a taxable person is not a 12-month period but a period between 6 and 18 months, the taxable person does not need to make any applications to change the start and end of the tax period.

Have you completed your Corporate Tax registration? In a previous article, we discussed the Corporate Tax registration procedure and the required documents.

How to Choose Your Financial Year?

You must be mindful of the following factors when choosing your financial year’s ending date:

1. Convenience

Ideally, your compliance deadlines should not overlap or be close to each other. The choice of your financial year determines your Corporate Tax filing deadline. You must file CT returns within 9 months from the end of the relevant tax period and pay your dues. So, at the very least, you should check if your trade license renewal deadline is close to the CT filing deadline.

Want to recheck key compliance dates for your business? Skrooge has built a compliance calendar that generates all relevant VAT, CT, audit, and license deadlines in one calendar for your business. You also have the option to export to your phone or save the calendar as a PDF.

2. Alignment with group

Parents and subsidiaries in a UAE Corporate Tax Group must have the same financial year as per the Federal Decree-Law no. 47 of 2022, or the Corporate Tax Law. If you plan on forming a group with another entity(s), you should check if these requirements will apply to your group and consider aligning tax periods from the get-go. From the auditor’s perspective, this simplifies validation of financial statements. It also removes redundancies from consolidation work.

Yet to register your tax group? A previous article of ours discusses when tax group registration is necessary, how to register tax groups in the UAE through EmaraTax, and the required documents.

3. Seasonality

If your Corporate Tax filing deadline is close to your seasonal highs, you may find yourself sacrificing performance for compliance.

4. Competing for auditors

Preparing audited financial statements can be tricky when most auditors are engaged by large businesses with large transaction volumes, who therefore may pay much higher fees. Hence, sticking to the default end date of 31st December may not be wise. You should consult auditing firms while choosing your financial year.

Are you preparing audited financial statements for the first time? Read our previous article on external audits to know what to expect and which documents to keep ready.

Can you change your financial year in the UAE?

As per the Federal Tax Authority Decision No. 5 of 2023, you must satisfy the following conditions to change your financial year:

1. You can change the financial year only for commercial, legal, or economic reasons, to align the tax periods across parent and subsidiaries in a tax group, for liquidation, or to benefit from foreign or domestic tax relief.
2. The change in financial year should not make the current tax period longer than 18 months.
3. A shortened next tax period should be between 6 and 12 months.
4. You must make the application within 6 months from the end of the original tax period.
5. You cannot apply to shorten your current tax period or a prior tax period.
6. You have not yet filed a return for the tax period you are applying to change.

Here’s how businesses can apply to change their financial years in the UAE:

1. Log in to EmaraTax.
2. Select your taxable person and click ‘View’.
3. From the Corporate Tax tile, click ‘Actions’ and select ‘Change Corporate Tax Period’.
4. Go through the latest instructions and guidelines displayed on screen, scroll down, confirm that you have read the displayed information by marking the checkbox, and click ‘Start’ to proceed.
5. Provide a detailed description of the reason for changing your tax period and upload supporting documents.
6. Select your new Corporate Tax period from the drop-down menu.
7. Choose whether to extend the current tax period or shorten the next tax period, as permitted by the FTA.
8. Click ‘Next Step’ to proceed to the review and declaration page.
9. Review the information you are about to submit, confirm that you have finished your review by marking the checkbox, and click ‘Submit’ if the application information is correct.
10. Note the application reference number for future communications with the FTA.

You can check the application status on EmaraTax. The FTA will notify you of its decision and request additional information or documents if necessary.

Can’t decide if applying to change your tax period is in your best interest? Consider Skrooge’s tax advisory services. Our tax experts can help you optimize return filings and meet other obligations with ease.

What does your financial year determine?

Your financial year determines the following tax reporting elements:

Accounting Responsibilities at Financial Year End

Towards the end of your financial year, you must perform the following duties to close your books and prepare returns and financial statements.

1. Reconcile bank and control accounts
2. Evaluate the reporting value of inventory
3. Calculate depreciation and update asset values
4. Calculate accruals and prepayments
5. Set aside Corporate Tax liability provisions
6. Prepare disclosures for related party transactions
7. Compile financial records and financial statements for the auditor to review

Finding it difficult to keep up with overlapping reporting obligations? As part of our accounting and tax package, Skrooge offers monthly bookkeeping and year-end reporting, tax filing support, and payroll.

Conclusion

If the strain on your business reduces by simply changing its financial year, this is an action you must consider seriously. As long as you comply with certain FTA requirements, it is possible to change your financial year online via EmaraTax.

However, simply changing the financial year will not magically improve accounting efficiency.

If you have been in business long enough, you may have realized that completing the checklist above becomes much harder when your books are months behind. Your accounting team will be stuck juggling the backlog, preparing VAT returns, and then suddenly, there’s the added burden of preparing annual financial statements and Corporate Tax returns.

If your business needs to improve its accounting function, consider Skrooge’s accounting and tax package. Our expert accountants can perform backlog accounting, prepare monthly financial statements, and provide tax filing support.

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