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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Averaging: successive claims

S222(2), (3), S224(1) Income Tax (Trading and Other Income) Act 2005

An individual who has made a claim to average profits for, say, 2010-11 and 2011-12 may then claim to average the profits for 2011-12 and 2012-13 and so on. Where such overlapping claims are made, the first year of the second pair is to be based on the profit determined by averaging or by marginal adjustment for the second year of the first pair. But once a claim has been made and settled, no claims for earlier years can be made.

Example 1

Profits before averaging are as follows:

Year £
   
2010-11 40,000
2011-12 24,000
2012-13 48,000

A claim is made for averaging 2010-11 and 2011-12 and subsequently a claim is made for 2011-12 and 2012-13.

The computations are as follows:

Year Profit before averaging Profit after averaging Final profit  
         
    First claim Second claim  
£ £ £ £ £
2010-11 40,000 32,000   40,000
2011-12 24,000 32,000 40,000 32,000 (-2010-11 tax adjustment)
2012-13 48,000   40,000 40,000 (+2011-12 tax adjustment)

Example 2

Profits before averaging are as follows:

2010-11 £40,000
   
2011-12 £28,500
2012-13 £48,000

Again, a claim is made for averaging 2010-11 and 2011-12 and subsequently a claim is made for 2011-12 and 2012-13.

The computations are as follows:

Year Profit before averaging Profit after averaging Final profit  
         
    First claim Second claim  
  £ £ £ £
2010-11 40,000 35,500*   40,000
2011-12 28,500 33,000* 40,500 33,000 (-2010-11 tax adjustment)
2012-13 48,000   40,500 40,500 (+2011-12 tax adjustment)
  • Marginal adjustment of ( 3 x 11,500 ) - ( 3/4 x 40,000 ) = 4,500.

See BIM84145 for an example demonstrating how relief is computed.