Overlap Losses

Overlap Losses

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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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Euan's picture
By Euan MacLennan
24th Sep 2013 13:15

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.

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By carnmores
24th Sep 2013 13:51

i suggest that you look at changing the fist period

to 5th april 2014 if profits continue to increase

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By sanderson
25th Sep 2013 15:20

Yes sorry Euan I think you are right, I'm getting confused completely aren't I? The overlap rules only apply then if you 'elect' to prepare the accounts to a different period end?

Carnmores could you expand further as to why that may be beneficial? If that is the case and I advise the client to do that how will their assessments work for 12/13 and 13/14?

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By Paul Soper
25th Sep 2013 16:23

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.

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Replying to lionofludesch:
Red Leader
By Red Leader
25th Sep 2013 16:29

Tolleys Tax Guide

sets it all out.

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By carnmores
25th Sep 2013 17:36

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 

 

 

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Replying to RedFive:
By dialm4accounts
27th Sep 2013 13:04

No double relief

carnmores wrote:

 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

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By Paul Soper
26th Sep 2013 19:10

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....

 

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By sanderson
27th Sep 2013 12:47

Carnmores and Paulsoper it sounds like you really value each others opinions :)

Yeah I get what you are saying now.  I suppose you would always just think of preparing accouns to 5th April to make it easier but if there are significant tax savings to be had here then that needs to be looked at obviously.

He's been employed during 12/13 and has employment income of circa £28k so the loss for the first couple of months of trading can be offset against that, to give him a small tax refund.

But then I suppose the question will be how to do things in 13/14, although there's plenty of time to think this through.  If we did a 14 month period (so Feb 13 to 5th April 14), in 13/14 he'd get assessed on the profits for the first 12 months (Feb 13 to Feb 14) and then would effectively get the loss relief twice.  Is that right?

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By Paul Soper
27th Sep 2013 17:19

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?

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By thehaggis
28th Sep 2013 14:48

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.

 

 

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By Paul Soper
28th Sep 2013 18:22

Well spotted Haggis

You are right of course, it would be £32,000 in total - makes sense now...

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