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HMRC internal manual

Business Income Manual

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:

  2011-12 2012-13 Totals
Before averaging £10,444 £5,391 £15,835
After averaging £10,444 £4,748 £15,192

These figures are computed as follows:

  2011-12 2012-13
Profits before averaging £40,000 £24,000
Tax due £10,444 £5,391
Averaged profits £32,000 £32,000
Tax due (say) £7,591 £7,600
Revised profits £40,000 £32,000
Tax due £10,444 £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.