Overlap Relief applies to Sole Traders and Partnerships.
Where 5 April is used as the annual accounting date throughout the entire life of a business, there will be no overlaps between basis periods. In such cases the total profits assessed to income tax will automatically equal the total profits made during the life of the business.
In any other case there will be one or more years in which the basis periods for two successive tax years overlap. These overlaps may occur:
- In years 2 or 3 during the period in which the basis periods and accounting periods are brought into alignment; or
- During the period of realignment following a change of accounting date.
To ensure that the total profits assessed to income tax exactly equal the total profits made during the life of the business, “overlap relief” is given.
The amount available to be given as overlap relief is the amount of profits which arise in any overlap periods. An overlap period is a period which falls within two basis periods. Guidance on computing overlap relief is at BIM71080.
Overlap relief is given as a deduction in calculating the profits of the trade for the tax year:
- in which the trade ceases (see BIM71095), and / or
- an earlier tax year in which a change of accounting date occurs if the basis period for that tax year is longer than 12 months (see BIM71090).
Here is an example:
A business commences on 1 October 2010. The first accounts are made up for the 12 months to 30 September 2011 and show a profit of £45,000.
The basis periods for the first 3 tax years are:
|2010-2011||Year 1||1 October 2010 to 5 April 2011|
|2011-2012||Year 2||12 months to 30 September 2011|
|2012-2013||Year 3||12 months to 30 September 2012|
The period from 1 October 2010 to 5 April 2011 (187 days) is an “overlap period”.