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Overlap Profit affects Sole Traders and Partnerships, here are a couple of examples from BIM81080
Example 1 – one overlap period
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 three 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’.
Example 2 – more than one overlap period
The business in Example 1 continues. In 2015-2016 the accounting date is changed from 30 September to 30 April. The accounts for the 12 months to 30 September 2014 show a profit of £75,000. The relevant conditions for a change of basis period are met (see BIM81045).
The basis periods are:
|2014-2015||Year 5||12 months to 30 September 2014|
|2015-2016||Year 6||12 months to 30 April 2015|
|2016-2017||Year 7||12 months to 30 April 2016|
The period from 1 May 2014 to 30 September 2014 (153 days) is an `overlap period’.
If the taxable profit for 2015-2016 is computed using days, it includes the profits for the `overlap period’ of 153 days (£75,000 x 153/365 = £31,438).
Adding together the overlap profits for the first overlap period of 187 days in Example 1 (£23,054) and the second overlap period of 153 days (£31,438), gives total overlap profits of £54,492 over 340 days.
Tax Cafe point out in their guide ‘Small Business Tax Saving Tactics‘
Why Hasn’t Everyone ‘Cashed In’ Their Overlap Relief Already?
There are two ways to gain access to your overlap relief: cease trading or change your accounting date.
Ceasing to trade is a drastic step: generally not something you are likely to do purely for tax planning purposes. However, it is worth noting that transferring your business to a company is also classed as ‘ceasing to trade’ for these purposes.
Changing your accounting date to access your overlap relief is less drastic, but the downside is that the relief only arises where you are being taxed on more than twelve months’ worth of profit. Despite this, however, there is still generally an overall saving to be made where current profits are at a lower level than the profits arising when the ‘overlap’ first arose. So, with the economy in the state it’s in, now could be a good time to ‘cash in’!
There is also some useful advice in Helpsheet HS222
Profit is vital to every business, what is the point of being in business if you don’t make a profit?
So here are my tips on how to improve your profitability:
- Weed out loss making products, clients and departments – concentrate on high margin products and services
- Reduce Employment Costs – use Freelancers instead of Permanent Employees where appropriate
- Use Virtual Communication Technology – meetings can be held over the internet with Skype or other systems, it will cut traveling time and costs
- Use Social Media and Networking – marketing can be costly and the results can be hard to measure, use your contacts to generate leads and sales and always ask for referrals
- Increase Productivity – eliminate wasteful and unnecessary processes, I was told it used to take 17 people in the NHS to change a light bulb on a hospital ward (requisitions, approvals, payments, changing the bulb…) the solution to cut wasted processes was to keep a stock of bulbs on the ward
- Negotiate with suppliers – always look at ways to reduce cost including using alternative suppliers
- Understand your clients requirements – the client knows what he wants and what represents value, if you deliver value you will get more business
- Seek add on sales – what other products or services might be useful to your existing clients
- Keep an eye on your competitors – competitor analysis will enable you to understand differences in price, distribution, market and demand
- Find New Markets – use market research to expand into new areas
- Decrease Overheads – analyse all of your overheads including Rent, Rates, Utilities – could you sub-let part or your premises or reduce waste
- Reduce Stock Levels – can you turnover your stock more quickly or buy to order
- Improve your Cash Cycle – reduce slow payment by debtors, invoice promptly and settle disputes quickly
- Invest in Technology – automate processes with ERP systems
- Use Key Performance Indicators – KPI’s help you achieve your goals
Essentially, the problem of Queuing is concerned with:
- Average waiting times
- The average length of the queue
- The number of service points (channels) there should be
- The cost of servicing the queue compared to cost of reducing waiting times
There are two main approaches to working out the solution:
- Queuing theory formulae
Queuing theory formulae can be complicated but are normally used in preference to simulation especially in simple situations.
Let’s take an everyday example, production staff queuing to collect stock from the company stores
So let’s run some numbers assuming the average number of production employees to be served every hour is 12 and we take 3 alternative service rates – 24, 18, 15 per hour, what is the probability of having to queue.
At 24 its 12/24 = 0.5 and the average number of staff in the queue will be 0.5/1-0.5 = 1 employee
At 18 its 12/18 = 0.67 and the average number of staff in the queue will be 0.67/1-0.67 = 2 staff
At 15 its 12/15 = 0.8 and the average number of staff in the queue will be 0.8/1-0.8 = 4 staff
The next stage is to work out the cost of servicing the production team quicker compared to the cost of a faster stores service to reduce queuing
If the production staff cost £20 per hour, based on a 6 hour day that’s £120 per day, that means based on the above the cost will be £120, £240 or £480 for queuing.
If the cost of a faster store man or faster servicing rate is less than the queuing cost then it’s worth investing to reduce the queuing cost.