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HMRC internal manual

International Manual

UK residents with foreign income or gains: income tax: Overlap profits

Where any new source of foreign income arose on or before 5 April 1994, application of the old commencement provisions means that income from the source will, in the early years, be assessed to UK Income Tax more than once. This is so for any source of income chargeable under Case V, when ICTA88/S66 applied, and also where the income represents part of profits assessable under Case I or II, when the basis periods on commencement were provided by ICTA88/S61 and ICTA88/S62.

Similarly, under the current year basis of assessment rules introduced by FA94, basis periods for any trade, profession or vocation may overlap with the result that profits or gains are included in the computation for two successive years of assessment. Such profits are `overlap profits’ and arise whenever a trade, profession or vocation is newly set up and commenced on or after 6 April 1994, and also when a business changes its accounting date to a date earlier in the tax year.

ICTA88/S804 (now TIOPA10/S22 & 24) enables additional tax credit relief to be allowed whenever the same income is being charged to UK tax for more than one year of assessment.

Claims for relief under Section 22 should be made on or before the fifth anniversary of 31 January next following the end of the year of assessment (years 1996-97 onwards, now TIOPA10/S23) or, if later, the 31 January next following the year of assessment in which the foreign tax is paid (for claims made on or after 21 March 2000 only (see ICTA88/S806(1) as amended by Finance Act 2000).)

Where a partnership change occurs on or after 19 March 1985 but before 5 April 1994 without an election under ICTA88/S113 (2) being made for continuation basis to apply, the trade, profession or vocation is treated as discontinued and a new partnership trade etc. is deemed to have been set up and commenced at the date of change. In these circumstances the application of ICTA88/S62 (4) may result in the same income being assessed more than once for years of assessment which are strictly outside the `years of commencement’ as defined in ICTA88/S804. If, in such a case, additional tax credit relief is claimed under ICTA88/S804 (1), refer the papers to the Offshore Personal Tax Team (part of Charity, Assets & Residence) before relief is granted.

The same principles apply where there is an overlap period for any other reason.