Transitional Overlap Relief clarification

Transitional Overlap Relief clarification

Didn't find your answer?

I have a new client sole trader that made accounts up to 31st August since before 94. I finished them 31st August 2013 to incorporate.

In terms of transitional overlap, I believe that I can claim for the period 1st September 1996 to 5th April 1997 which based on profits before CA's in the 31st August 1998 year means 219/365 x £40,000 = £24,000 to be deducted from the final year's profit for tax purposes.

Firstly, is that right as this makes a big difference to the final years tax and if it is, why is it right as I cannot see why HMRC would give away such a large benefit?

Any help would be appreciated.

Thank you

regards 

Replies (8)

Please login or register to join the discussion.

Euan's picture
By Euan MacLennan
04th Sep 2014 14:29

Not quite right

Your transitional overlap period is 217(not 219)/365 of the year ended 31st August 1997, not 1998.

It is not generous of HMRC.  It arose when the basis of assessment for sole traders changed from "preceding year" to "current year" and the profits of the overlap period were used as the basis of tax for two different years or to put it another way, they were taxed twice.  Hence, the deduction of overlap profits in the year of cessation merely removes the duplicate taxation or to put it another way, it reduces the period on which tax is due in 2013/14 from the 12 months to 31 August 2013 by the 7 months of the overlap period, so that you end up with the 2013/14 assessment being based on 5 months of trading, the actual period of trading in the current year.

Thanks (1)
avatar
By The Innkeeper
04th Sep 2014 14:26

@Euan

Spot on as usual. Assuming that the £24k is the correct figure why are you only incorporating now? If you had incorporated sooner the £24K would have been worth more to your client in real terms

Thanks (0)
Replying to KateR:
avatar
By davebrown123
04th Sep 2014 14:33

why not incorporate earlier.............

........................because this was a new client I acquired because the old accountant cold no longer cope with handwriting out the self assessment tax return and had no idea about Ltd Companies. The first thing I did was incorporate!   

Thanks (0)
By Marion Hayes
04th Sep 2014 14:35

Crossover prom PY to CY

Before SA began 31/8/94 formed the basis of assessment for 1995/96.

1996/97 was then based on 1/9/94 to 31/8/96, 731 days (leap year) x365 - 49.93%.

Capital Alowances were not legally to be treated as an expense of the accounts.  Capital allowances were 12 months only.

1997/98 was based upon the year to 31/8/97 so there was no physical overlap.

However, under the old rules on cessation a complete year of profits fell out of assessment because of the way the profits had been taxed  on commencement/ Transitional overlap was designed to compensate them for losing that advantage. For the first time under the new rules the profits earned over the lifetime of a business would match the amounts taxed and HMRC would be getting their share earlier than before so they were prepared to sweeten the pill with transitional overlap.

Edit: crossed with Euan. He corrected your base period in simpler terms too!!

Thanks (0)
avatar
By The Innkeeper
04th Sep 2014 14:41

Wow

Practitioners still completing tax returns manually. Scary Stuff!

On a slightly more serious note I was concerned that you might have had a PI issue with the decreasing value of the overlap relief over time. In addition there are those of us old enough to remember when Unused Stock Relief was abolished and unused overlap relief could I suppose go the same way.

Thanks (0)
RLI
By lionofludesch
04th Sep 2014 18:12

Agree with previous replies

This isn't HMRC generosity.  It's profits which have been taxed twice at some point - albeit with the complication that the profits taxed twice weren't for the same period as those for which relief's given.  There were a lot of anomalies with the old PY system - most of the time they were advantageous to the taxpayer.  Occasionally, they weren't.

Not sure about Innkeeper's comparison with Stock Relief.  Writing off stock relief could only benefit the taxpayer.  Writing off overlap relief - which may not be particularly old, as it's still with us - could only benefit HMRC.

I took on a client from an unqualified accountant a few years ago.  He had a June year end - been trading since the 1980s.  I asked for the overlap relief.  "There is none" said the UA.  Seemed unlikely, as the taxpayer had a well established business by then so I ask HMRC. Turned out to be £10000+ of relief, worth over £3000 in tax and NIC.

As an aside, I used to keep a note of overlap relief by entering it on the tax return, back in the paper days.  You can't do that on the software, so make sure you've got a note on the permanent file.   I still have around a dozen clients with overlap relief - all of whom were trading before 1997.

Thanks (0)
avatar
By The Innkeeper
04th Sep 2014 20:39

@lionofludesch
Why do you keep a note of the overlap relief on your file? There are boxes on the full self employed pages that do this for you.

My reference to unused stock relief was merely to point out ,especially to younger practitioners, that such reliefs ( including overlap relief ) can and are abolished by HM Government.

Thanks (0)
Replying to Michael Davies:
RLI
By lionofludesch
05th Sep 2014 08:56

Afraid I disagree

The Innkeeper wrote:
Why do you keep a note of the overlap relief on your file? There are boxes on the full self employed pages that do this for you. My reference to unused stock relief was merely to point out ,especially to younger practitioners, that such reliefs ( including overlap relief ) can and are abolished by HM Government.

1. The file's as good a place as any.  Some of these clients don't need full self assessment pages.  And I'd have to handwrite it in anyway.

2. It wasn't unused stock relief, was it ?  On the contrary it was stock relief taxpayers had already had and it was the clawback that was abolished.  Taxpayers were let off a potential charge.  Sure, the Government could abolish overlap relief - it can do what it wants within reason - but I can't see that happening.  It would mean that a taxpayer starting, say, 1 May 2012 and preparing accounts to 30 April would be taxed on 23 months' profit in the year of change.  Not likely to be a vote winner.

Thanks (0)