BIM81300 - Transitional rules: treatment of losses arising from deduction of overlap profits from transition profits
Where overlap relief is deducted from the transition profit/loss (in step 3 of the calculation of profits for the 2023-24 basis period), or exceptionally from the standard part where a deduction has not been claimed on a change of accounting date in an earlier tax year, this may result in:
- the profit for 2023-24 turning into a loss or
- the loss for 2023-24 becoming greater than it would have been were it not for the deduction
These losses (or increase in losses) are treated as if they were terminal losses under sections 89 to 91 of the Income Tax Act 2007 and as if the trade permanently ceased on 5 April 2024. This means that the proportion of losses that arose from giving overlap relief can be utilised in the same way that terminal losses are utilised under sections 89 to 91 of ITA 2007.
Computing the amount of the loss
The loss that is treated as a terminal loss is:
- where the profit for 2023-24 has turned into a loss, the amount of the loss arising as a result of the deduction of overlap profits
- where the loss for 2023-24 has become greater, the amount by which the loss of the has increased as a result of the deduction of overlap profits
In practice this amount will be the lower of the overlap profits deducted at Step 3 (or exceptionally from the standard part) and the overall loss for the year.
Example 17 – deduction of overlap profit increases the amount of loss
A trader draws up accounts to 30 April annually. The accounts to 30 April 2023 show a loss of £12,000 and the accounts to 30 April 2024 show a loss of £6,000. They have overlap profits of £4,000.
The profit for the 2023-24 transition year is calculated as follows:
| Step | Description |
|---|---|
| Step 1 | The loss of the standard part of the basis period: 1 May 2022 to 30 April 2023: (£12,000) |
| Step 2 | The loss of the transition part of the basis period: 1 May 2023 to 5 April 2024: (£6,000) x 341/366 = (£5,590). The losses from the 30 April 2024 accounts are apportioned. |
| Step 3 | Deduct from the amount in step 2 any overlap profit allowed: (£5,590) – £4,000 = (£9,590) |
| Step 4 | Calculate the sums of the amounts given by steps 1 and 3: (£12,000) + (£9,590) = (£21,590). As both the amounts given by steps 3 and 4 are a loss, the loss for the basis period is the amount given by this step. |
£4,000 of losses will be treated as if they were terminal losses, as the amount of overlap relief (£4,000) is lower than the overall loss (£21,590).
The remaining losses will be available for relief as normal trading losses. See BIM85000 for the different ways in which trade losses can be used.
Example 18 – deduction of overlap profit creates a loss
A trader prepares accounts to 30 September annually. The accounts to 30 September 2023 show a profit of £8,000 and the accounts to 30 September 2024 show a profit of £10,000. They have overlap profits of £15,000.
The profit for the 2023-24 transition year is calculated as follows:
| Step | Description |
|---|---|
| Step 1 | The profit of the standard part of the basis period: 1 October to 30 September 2023: £8,000 |
| Step 2 | The profit of the transition part of the basis period: 1 October 2023 to 5 April 2024: £10,000 x 188/366 = £5,137. The profits from the 30 September 2024 accounts are apportioned. |
| Step 3 | Deduct from the amount in step 2 any overlap profit allowed: £5,137 – £15,000 = (£9,863) |
| Step 4 | Calculate the sums of the amounts given by steps 1 and 3: £8,000 + (£9,863) = (£1,863). As both the amounts given by step 3 and 4 are a loss, the profit/loss for the basis period is the amount given by this step. |
The entire loss of £1,863 will be treated as if it were a terminal loss, as this amount is lower than the overlap profit deducted (£15,000).