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HMRC internal manual

Business Income Manual

Averaging: full averaging

S223, S224(3) Income Tax (Trading and Other Income) Act 2005

Where the difference between the profits of two consecutive tax years is 30% or more of the higher of the two figures of profit (and regardless of whether the difference is a rise or a fall), the profits of the two years may be averaged. The profit of the later year becomes the sum of the two profits divided by 2. The profit of the earlier year is unchanged, but the tax due for the later year is adjusted up or down to take account of the effect on the liability for the earlier year had the profit been adjusted on the same basis as the later year. See BIM84145.


A trading loss is treated as a nil profit for averaging purposes (see Example 2). This enables the loss relief to be claimed under the normal rules without the measure of the loss available for relief being affected by averaging.

Example 1 - normal averaging

Profits from an established farm business are as follows:

Basis period year to 31 December 2011 £40,000
Basis period year to 31 December 2012 £24,000

The taxable trade profits are therefore as follows:

2011-12 £40,000
2012-13 £24,000

A claim for averaging the profits is made before 31 January 2015.

The claim is competent because the difference of £16,000 exceeds 30% of the higher figure of £40,000. The averaged profits are therefore £40,000 + £24,000 divided by 2 = £32,000 for each tax year.

The self-assessment for 2011-12 remains unaltered at £40,000 while the 2012-13 self-assessment is increased to the averaged profit of £32,000 but also includes a tax adjustment equal to the reduction in the tax charge for 2011-12 had the self-assessment for that year been reduced from £40,000 to £32,000. See BIM84145 for a more detailed explanation and example.

Example 2 - averaging where there is a loss in one year

A farmer has the following results:

Basis period year to 30 September 2011 Profit £50,000
Basis period year to 30 September 2012 Loss £10,000

The profits before averaging are therefore:

2011-12 £50,000
2012-13 Nil

but averaged profits become:

2011-12 £25,000
2012-13 £25,000

Note the self-assessment for 2011-12 remains at £50,000. See BIM84145 for how relief is actually given.

The £10,000 loss is available for relief in the normal way against general income for 2011-12 or 2012-13 or for carrying forward.