I have a client who has commenced trading early February 2013. So his first basis period, which he will be assessed on is February 2013 (lets say 1st February) to 5th April 2013. For this short period he has made a small loss.
For 2013/14, trade has picked up significantly and he will be making a trading profit of around £30/£35k I'd imagine. Now despite remembering doing this in my exams, I can't remember exactly how overlap losses work. They work in the same way as overlap profits under the opening year rules, except that the losses can't be relieved more than once if I'm not mistaken. Please feel free to correct me if I'm wrong.
So for 2012/13, he gets assessed for 2 months and then for 2013/14, can I just account for the profit from 06/04/13 to 05/04/14 and then going forward do the same for each respective tax year?
I should know this but haven't dealt with opening year rules in a long time.
Many thanks,
Replies (12)
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What overlap?
If you prepare accounts to 5th April each year, there is no overlap.
You will have the small loss in 2012/13 available for relief against other income for the year, etc., and then a profit of £30/35k in 2013/14.
i suggest that you look at changing the fist period
to 5th april 2014 if profits continue to increase
Overlap PROFITS
The important word here is profit... if there is a loss the profit is NIL. The loss is relieved complete separately. If you chose an accounting date other than 5th April there might be an amount of overlap profit arising, with a 28 February year end you would expect 2 months 5 days worth of overlap as the profit of the whole period (with the loss now subsumed into the profit) would have formed the basis for 2 months 5 days of 12/13 and the whole of 13/14, It is because profits are taxed twice that overlap relief is given. If you use a 5 April year end there will never be any overlap relief. You do have the choice of preparing accounts for 2 months 5 days, and then a year or 14 months 5 days to 5 April 2014. You need to work out the maths to see which is the better option. Neither will give rise to overlap relief.
Paul is of course correct
opening year rules
first year period to 5th April
Second first 12 months
third 12 month period ending in year
so if the profits are increasing year on year why not use the losses in the opening period more than once and get overlap relief by using say a first period end to 5th April 2014 or possible even more adventourously to 30th June 2014
No double relief
why not use the losses in the opening period more than once and get overlap relief by using say a first period end to 5th April 2014 or possible even more adventourously to 30th June 2014
If I remember rightly you can't use losses more than once? Profits can be taxed twice, but losses can't be relieved twice?
M
Carnmores is correct too
Not a mutual love-in but a reminder that you don't have to have a 31 March/5 April year end. Choosing a longer period could mean that the loss reduces profits more than once with a potentially significant cash flow advantage - capital allowances and pre-trading expenditure have the same effect.
In later years if profits continue to grow you will a year by year cash flow advantage and, if you take the opportunity, the ability to know what your client's profits are during the tax year when you could plan maximum pension contributions, avoid the loss of personal allowances etc.
Only this afternoon I was talking to an accountant with a client seeking to maximise pension contributions but - after the year end but before the accounts were prepared, suffering a substantial bad debt, the effect is that the contribution exceeds the income of the year. Witha 30th April or June year end this can be avoided.
Who's afraid of the big bad overlap relief....
Here's some figures...
Suppose you start on 1 Feb 2013 and make a loss of £5,000 in the two months to 31 March 2013. The following year you make £12,000 profit and the year after £20,000.
2012/13 assessment nil loss available £5,000
2013/14 first 12 months nil +10/12ths of £12,000 = £10,000
2014/15 year ending £20,000
Total assessed in three years £30,000 - loss offset which could go back as far as 2009/10
Prepare first set of accounts for 14 months to 31 March 2014 - profit £7,000
2012/13 assessment 2/14 x £7,000 = £1,000 - no loss to offset
2013/14 12 months 12/14 x £7,000 = £6,000
2014/14 year ending £20,000
Total assessed in three years £27,000 - and no loss relief - not a good idea
Now assume 15 months to 30 April 2015 - profit (say) 8,000 (5,000 loss, £12000 profit plus £1,000 for extra month)
2012/13 assessment 2/15 x £8,000 = £1,066
2013/14 12/15 x 8000 £6,400
2014/15 12/15 x 8000 £6,400
A total for the three years of £13,866 and overlap relief to carry forward of 11/15 x £8000 = £5,866 - carry forward until change accounting date of cease trading.
Other factors include loss of personal allowances, use of capital allowances, pre-trading expenses etc etc.
On cessation there could be 23 months profits assessed in the final year minus the 11 months overlap relief.
Who's afraid of the big bad overlap relief?
Are you sure?
1st period is to 5 April. Loss £5000. This supposes that accounts have been drawn up to that date.
You say the profits for the next YEAR are 12,000. That suggests the accounting date is 5 April. The basis period would be the 12 months ended on the accounting date, meaning profits assessed are £12,000.
If you mean that there is a new accounting date of 31 January (10 months), then the basis period is 12 months to that date. That would be profits of Nil plus 10/10 x £12,000.
Well spotted Haggis
You are right of course, it would be £32,000 in total - makes sense now...