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HMRC internal manual

Enquiry Manual

HM Revenue & Customs
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Concluding the Enquiry: Time Barred Claims - Averaging

Averaging for farmers and creative artists

Averaging is an unusual relief because a claim results in

  • an amendment to the profits of the later year of the pair concerned, and
  • an adjustment to the tax of the later year based on the circumstances of the earlier year.

The main guidance on normal averaging claims is in help sheets HS224 (farmers) and HS234 (creators of literary and artistic works) and at BIM84000+.

Where the profits of either of the pair of years affected by an averaging claim made within the normal time limit are adjusted the claim is treated as never having been made ITTOIA’05/s225 and the taxpayer has an opportunity to make an election based on the new circumstances. For guidance on this situation see BIM84150.

This following guidance looks specifically at the special situation where a taxpayer wishes to amend or make an averaging claim after the normal time limit of 22 months after the end of the later of the two years of assessment concerned.

Where the taxpayer has missed the normal time limit, averaging claims may still be made in enquiry cases under TMA70/S36 or TMA70/S43 and TMA70/S43C. And, as explained at EM3905, the same treatment is given for years which are settled by a contract settlement. The claim is limited to the amount by which the profits are increased as a result of the enquiry.

In a failure to notify case, there will be no restriction because the whole of the increase in profits results from the enquiry. But in other cases there may be a restriction to the amount by which averaging reduces the profit. If there is such a restriction then the increase for the other year is reduced by the same amount as shown in the following example.


Sheena, an author, did not claim averaging for 2004/5 and 2003/4 because her marginal rate of tax was the same for each year, so a claim would have had no tax effect. As a result of an enquiry in 2008, additions to profits of £10,000 were made for 2004/5 which makes her liable to higher rate tax. So she claims averaging. The effect is as follow.

  2003/4 2004/5 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 assessment 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. By concession the adjustment in terms of tax is based on additional profits of £10,000 for 2003/4 rather than £12,000.

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

  2003/4 2004/5 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 for 2004/5, based on the circumstances of the previous year, would have been

Tax if profits were £40,000

Less Tax if profits were £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 2004/5 is restricted to £10,000.