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HMRC internal manual

Business Income Manual

Averaging: example of a two year claim with loss cap restriction

A market gardener has the following profits and would like to consider an averaging claim in 2016/2017.

Tax Year Profits
   
2015/2016 £92,468
2016/2017 -£265,480

As the volatility and other criteria are met an averaging claim can be made.

The averaging computation looks like this.

Tax Year Profits Profits for averaging Averaged Profits
       
2015/2016 £92,468 £92,468 £46,234
2016/2017 -£265,480 £0 £46,234

So, the market gardener’s profit for all tax purposes are now £46,234 for each year.

The £265,480 of trade losses can be used in the normal manner.

The market gardener’s general income for 2016/2017 is £300,000, consisting of employment income of £253,766 and averaged trade profit of £46,234.

The amount of trade loss relief that can claimed for 2016/2017 is £121,234.

The figure of £121,234 is made up of £75,000 being the capped amount of relief (S24A (5) Income Tax Act 2007) and £46,234 that is not subject to the cap.

For further information on the relief cap see HS204 Limit on Income Tax Reliefs on GOV.UK.