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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Averaging: amendments to profits: reasons other than averaging: no averaging claim in place

In a situation where the option to elect for averaging was not exercised and the profits for both or either of the years are amended, for any reason other than the making of an averaging claim, say after an enquiry, the impact of a subsequent averaging claim is restricted to the amount of the adjustment to the profits.

If additions to returns are established but the time limit for making an election has passed, a late election should be admitted, but as demonstrated in the example below its effect is restricted to the amount of the additions.

Example

Julie, a pedigree Texel sheep breeder did not claim averaging for 2008-09 and 2007-08. An enquiry results, in 2012, in the addition of £10,000 to her profits for 2008-09 which makes her liable to higher rate tax. She claims averaging. The effect is as follows:

  2007-08 2008-09 Totals
       
Declared profits £16,000 £30,000 £46,000
Additions   £10,000  
Revised profits £16,000 £40,000 £56,000
Averaged profits £28,000 £28,000 £56,000

Averaging cannot reduce the profit for the later year below £30,000, the amount originally declared. Strictly the adjustment in terms of tax based on the circumstances of the earlier year should nonetheless be computed by reference to additional profits of £12,000 (£28,000 - £16,000). By concession the adjustment in terms of tax applied to the 2008-09 return, is based on additional profits of £10,000 for 2007-08 rather than £12,000.

Had the figures for the two years been reversed the same principle would have applied with the following result:

  2007-08 2008-09 Totals
       
Declared profits £30,000 £16,000 £46,000
Additions £10,000    
Revised profits £40,000 £16,000 £56,000
Averaged profits £28,000 £28,000 £56,000

Without a restriction the adjustment in terms of tax to 2008-09 based on the circumstances of the earlier year would have been tax on profits of £40,000 less tax on profits of £28,000.

But that would involve opening the figures originally returned, so the £30,000 originally returned is used instead of £28,000 and the addition for 2008-09 is restricted to £10,000.

See BIM84145 for a detailed example of computing a giving the tax adjustment.