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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Computation of liability: previous year basis - transitional overlap relief

S53 Income (Trading and Other Income) Act 2005

Under the current year basis period rules, all profits over the life of the business are subject to tax. Under the previous year basis period rules some profits would have escaped tax because they fell within a gap between the basis periods for years leading up to cessation of trading. See BIM81100. The averaging process in the transitional ‘current year’ rules for 1996-1997 allowed some profits to escape tax in the transition to the current year basis. See BIM81105. A further adjustment is provided in the form of ‘transitional overlap relief’, which is given when a continuing trade changes its accounting date or ceases to trade.

The amount of transitional overlap relief given in any case equals the profit (usually before capital allowances are deducted) between the end of the basis period for 1996-1997 and 6 April 1997. The exception is where the trade is carried on by partners in a mixed partnership of individuals and companies, where the profit on which transitional overlap relief is due is after adjustment for capital allowances.

Transitional overlap relief is carried forward indefinitely as if it were overlap relief and is relievable as overlap relief in the normal way, see BIM81075.

(Where there was an overlap between the basis period for 1996-1997 and the basis period for 1997-1998, overlap relief was due in the normal way.)


Paul has been in business for many years, making up accounts to 31 December each year. At the time of transition to the current year basis, his basis periods were:

1996-1997 24 months to 31 December 1996
1997-1998 12 months to 31 December 1997

Transitional overlap relief arises for the period 1 January 1997 to 5 April 1997 (3 months).

If Paul’s profit for 12 months to 31 December 1997 was £15,000 less capital allowances of £3,000, the taxable profit for 1997-1998 was £12,000.

The profit of the transitional relief period (before deducting capital allowances) was 3/12 x £15,000 = £3750 (over 3 months).

Paul continues in business until 30 September 2012. Accounts are made up to that date on cessation. The final basis periods are:

2011-2012 12 months to 31 December 2011
2012-2013 9 months to 30 September 2012

The unused transitional overlap relief brought forward is deducted from the taxable profit of the final accounting period:

Profit for 9 months to 30 September 2012 £60,000
Transitional overlap relief (£3,750)
Taxable profit £56,250