Apologies as I have already asked a similar question but I just wanted to check I have understood this correctly!
Client commenced trading on 1st Jan 2011. I have prepared accounts for the first basis period 1st Jan 2011 - 5th April 2011. The accounts show a loss of several thousands of pounds. I understand this can be offset against employment income for the same tax year to obtain a tax rebate.
Basis period 2 would cover 1st Jan 2011 - 31st Dec 2011 and include the losses for that initial three month period. This would be reported as normal.
On cessation the business would effectively claim a negative overlap relief for the losses claimed in basis period 1? I understand how this works when a business makes a profit in their first basis period but for some reason I cannot get my head around what do when there is a loss!
Many thanks for any help and advice offered.
Replies (7)
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Eh?
If you have prepared accounts for the period from 1st January to 5th April 2011, your next accounting period starts on 6th April 2011 and there would be no overlap. You can prepare the second accounts for the 9 month period to 31st December 2011 if you really want to, but why not keep it simple and prepare them for the year to 5th April 2012, thus avoiding all problems with overlap relief.
However, to answer your question, overlap relief is intended to avoid the same profits being taxed twice - there is no such thing as overlap losses.
What would you do in this situation?
Accounts prepared for the year to 31 Dec 2011 show a loss of £12k
Assessed as follows
Tax Return 2011 - Period to 5 April 2011 say £3k loss
Tax Return 2012 - 12 months to 31 Dec 2011 £12k loss
Effectively have received relief for £15k as opposed to £12k. What happens to the other £3k relief that has been obtained?
Understand if was a £12k profit then would get overlap relief of £3k. What happens if you have a loss?
You disclose 12 months figures in the 1st return and tell them in 11/12 that accounts were reported in 10/11 return. Apportion £3k loss to 10/11 & £9k loss to 11/12
Is that correct Ronaldo?
I thought in the first base period you declared results to 5 April and the second period the first 12 months. So effectively overlaping the period in the first base period to 5 April?
Either works
You can either show all of the accounts details in the 2011 return or the 2012 return with the relevant ticks in boxes to show you have done it - crucially you need to use "Adjustment required" boxes to apportion the loss between the tax years. You cannot claim twice for the same loss and that is why there is never "Overlap losses"
Separate basis periods for losses
The basis of losses are separate from profits.
For example assuming a loss of £12,000 for the year ended December 31 2011 the correct position is:
Profits
2010/11 - profit assessable - zero (based on period to April 5)
2011/12 - profit assessable - zero (based on year to December 31) zero overlap profit
Losses
2010/11 - loss allowable - approx £3,000 (based on period to April 5)
2011/12 - loss allowable - approx £9,000 (based on year to December 31) and subject to the results up to April 5 2012.
See pages 10 and 11 of HMRC toolkit on losses
http://www.hmrc.gov.uk/agents/toolkits/income-tax-losses.pdf