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I need help with overlap relief for a new client.

Hi All!

I have recently acquired a sole trade client who has the year end of 31 July.

We've spoken about changing her year end to bring it in line with the tax year, however I'm slightly struggling with the overlap relief. There is no mention of overlap relief on any of her previous years returns and I think there should have been some brought forward? Can I calculate the overlap and add it in? If it isn't brought forward on her return, does she just have to pay the whole amount of tax due for the extended period? I'm not 100% on this so anyone with any advice would be great.

I'm also aware that I won't be able to extend her return this year to 05 April because the period is too long.

Thank you!

Sam

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18th Dec 2017 13:19

Strangely, it's not supposed to be on her return. When we had proper paper returns, I used to put it in the brought forward and carry forward boxes, just to keep it to hand but, if you do that with software, it'll reject it as an error.

If you don't know what the overlap relief is, ask HMRC. They'll know.

If the period to be covered is over 18 months, you can include two sets of accounts, so you can change this year if you wish.

You seem very blasé about advising this change. Think carefully. Being in line with the tax year may or may not be a good idea. It's not a decision you should make without knowing the overlap relief. It could crystallise a huge tax liability.

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By Swweex
to lionofludesch
18th Dec 2017 13:20

Thank you.

It wasn't something that I advised we should just go ahead and do but the lady in question wanted to know what the advantages and disadvantages were so I just wanted to make sure I could go back to her with some solid answers, but it was just that overlap relief that was catching me out.

It's good to know for now and for the future that I was looking for something that wasn't actually supposed to be on her return but I will definitely be calling HMRC to see what the figure is.

Thank you very much for your help!

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to Swweex
18th Dec 2017 13:30

You can't advise her without knowing how current profitability compares with that of the overlap period.

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By Swweex
to lionofludesch
18th Dec 2017 13:34

Yes, I'm going to phone HMRC this afternoon and do some calculations from there.

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By Matrix
18th Dec 2017 15:05

Agree with above advice - HMRC were able to provide me overlap relief from 20 years ago over the phone.

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to Matrix
22nd Dec 2017 10:07

I always get them to confirm it in writing as I am a sole practitioner and it would be my word against theirs. Besides which, HMRC are now issuing penalties at the drop of a hat.

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18th Dec 2017 17:00

should this not be in box 70 SEF4 every year and Box 69 when relieved?

We have found it difficult to get it from HMRC if not brought forward by previous agents

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to Anne Robinson
18th Dec 2017 17:12

Taxfiler wouldn't allow it last time I tried this.

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By RedFive
18th Dec 2017 17:33

I've got a client with Overlap Profit c/f in Box 70 of SEF 4, filed using TaxCalc for 2016-17.

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18th Dec 2017 18:25

As Lion has said you need to do the sums and explain the unexplainable to the client. If the client is planning to have a quiet year or tailing off to retirement it may be a good time then to crystallise the overlap relief. I've moved all my clients bar one to a 31 March year end to provide some certainty going forward. One was a particularly expensive exercise since profits had doubled since 1998.

It is correct that you shouldn't have a period exceeding 18 months but I've done a couple with a 23 month period which have been accepted by (a) my software and (b) HMRC. Either way there's no difference to the tax liability.

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to thomas34
18th Dec 2017 18:46

thomas34 wrote:

It is correct that you shouldn't have a period exceeding 18 months but I've done a couple with a 23 month period which have been accepted by (a) my software and (b) HMRC. Either way there's no difference to the tax liability.

That's what Ron Weasley's accountant said.

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to lionofludesch
18th Dec 2017 19:45

your posts are becoming increasingly cryptic!

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to Red Leader
18th Dec 2017 22:07

Look up the Rupert Grint tax case.

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to lionofludesch
20th Dec 2017 12:05

As Paul Daniels said "Now that's Magic!"

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19th Dec 2017 09:36

Depending on how long ago it is since she commenced, you may be able to get copies of the earliest Returns from HMRC, which should offer a clue (I've recently had almost exactly the same issue, though unfortunately the earliest Return HMRC could produce was 1996/97, which wasn't early enough).

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19th Dec 2017 09:50

Don't fall into the trap of believing that HMRC haven't got a note of the overlap relief.

If they didn't keep a record, you could put any old number in as overlap relief.

No - they know what it is.

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20th Dec 2017 11:45

One point not covered here is that with a 30 April year end the tax is payable after retirement and this can cause the client cash flow problems.

I for one recommend with pros and cons that taxpayers consider changing. Bear in mind that overlap relief has no inflation adjuster so that over the years its real value falls

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to pauljohnston
20th Dec 2017 11:59

It depends. Some people reduce operations as they approach retirement. Some sell their business.

I for one expect my transitional relief to match or even exceed my income by the time I retire.

And, of course, an April year end now does not necessarily mean an April cessation date. Nor is pumping a disproportionate income into April necessarily a bad thing - the client may have retired prior to entitlement to pension.

Each client's case has to be seen in the light of his circumstances. No generalisations.

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