What are overlap profits?

The assessment of self-employed or partnership profits is relatively straight-forward if the accounting date, to which accounts are prepared, falls between 31 March and 5 April. However, year ends that fall outside these dates create overlap profits.

Overlap profits can be created in the first 3 years of the business or in any year in which there is a change of basis period and accounting date.

For example, if your business commences 1 January 2016, and your chosen year end date is 31 December 2016, your basis periods are:

  • 2015 to 2016, 1 January 2016 to 5 April 2016
  • 2016 to 2017, 1 January 2016 to 31 December 2016

Accordingly, the profits from 1 January 2016 to 5 April 2016 are taxed twice and are known as overlap profits.

Overlap profits relief can be used to reduce the profits on the final tax return when the business ceases trading or if the accounting period changes.

Planning notes:

If the overlap profits were created some time ago, and profits have been declining in recent years, it may be prudent to consider a change of accounting date closer to, or at the end of, the tax year. In this way, the overlap profits can be deducted and tax liabilities reduced at a beneficial time for the business or partnership.

It is important to remember that any change in accounting date in any of the previous 5 tax years, must be for a genuine commercial reason. HMRC is clear that doing so in order to obtain a tax advantage isn’t a commercial reason.

If you are self-employed, and have a year end date that is not in the 31 March to 5 April window, please call if you would like to discuss the utilisation of your overlap profits.

Posted in HMRC notices

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