Averaging: giving effect to a claim
Sch1B Para3 Taxes Management Act 1970
Claims for averaging are given effect in, or by amendment of, the return of the later year. In other words averaging does not affect the amount of tax due for the earlier year. The tax effect of averaging the two years’ profits is taken into account in the later year. See the example below.
In example 1 at BIM84130 the net tax due (including class 4 NIC) is, say:
These figures are computed as follows:
|Profits before averaging||£40,000||£24,000|
|Tax due (say)||£7,591||£7,600|
|Less averaging claim tax adjustment*||£2,853|
|Net tax due||£10,444||£4,748|
*Averaging claim adjustment is calculated thus - £10,444 less £7,591 = £2,853.
Averaging claims are made in the return of the later year by including an averaging claim tax adjustment in that return. This adjustment can be positive or negative depending on whether the later year’s profits are higher or lower than the earlier year.
An averaging claim tax adjustment is the extent that the claim would have affected the earlier year had that year’s self-assessment been amended. Where this generates a repayment see BIM84165.
To summarise, when a competent averaging claim is made:
- the self-assessment for the earlier year should not be amended,
- the self-assessment for the later year should reflect the averaged profit,
- an averaging claim adjustment should be calculated in terms of tax and included in the return for the later year.