Change of accounting date – Overlap profits
Overlap profits may arise on a change of accounting date if the new accounting date is less than 12 months from the end of the previous accounting period. This is illustrated by the following example.
Albert has been a sole trader for many years preparing accounts to 30 September each year. In 2020, he changed his accounting date to 30 April. The new accounting date of 30 April 2020 is less than 12 months from the previous accounting date of 30 September 2019.
The profits assessed in 2019/20 and 2020/21 are as follows:
|Year to 30 September 2019
|12 months to 30 April 2020
As a result of the change of accounting date, the profits for the period from 1 May 2019 to 30 September 2019 are taxed twice. These are overlapping profits.
Change of accounting date – overlap relief
If on a change of accounting date, the new accounting date is more than 12 months from the old accounting date, and the trader has overlap profits that have yet to be relieved, overlap relief may be given on the change of accounting date. Overlap relief is given by deducting the overlap profits from the profits for the tax year in which the change of accounting date occurs.
However, the relief is restricted by reference to the number of days in the overlap period and the number of days for which the basis period for the tax year in which the change of accounting date exceeds 12 months.
Maud, from example 1, changes her accounting date to 30 October in 2021, preparing accounts for 18 months to 30 October 2021.
Her overlap profits are for the period from 1 June 2016 to 5 April 2017 – a period of 309 days.
Her new accounting period exceeds 12 months by 184 days.
Assuming her overlap profits are £30,000, she will be able to claim overlap relief of 184/309 x £30,000, i.e. £17,864 on her change of accounting date. Overlap relief is restricted to 184 days.
Overlap relief in the final year
Under the current rules, if overlap profits have not been relieved when the business ceases, relief is given by deducting the overlap profits from the profits assessed in the final tax year.
Basis period reform
The basis period rules are being reformed, moving to a tax-year basis from 2024/25. The 2023/24 tax year will be a transitional year in which relief for any unrelieved overlap profits will be given.
Partner note: ITTOIA 2005, ss. 204—207; Finance Bill 2021—22, cl. 7 and Sch. 1.