|
| |
|
| The result of this step is “one day’s worth of remaining overlap profit”. |
| |
| |
| Subtract the number of days in the tax year from the number of days in the |
| |
| |
| The balance is “the number of days’ worth of overlap profit that may be |
| 5 |
deducted on this occasion”. |
| |
| |
| Multiply one day’s worth of remaining overlap profit (see Step 4) by the |
| |
number of days’ worth of overlap profit that may be deducted on this occasion |
| |
| 10 |
| The result of this step is the amount of the deduction. |
| |
(4) | The above steps are expressed in terms of numbers of days in periods, but the |
| |
person carrying on the trade may use a different way of measuring the length |
| |
of the periods concerned if— |
| |
(a) | it is reasonable to do so, and |
| 15 |
(b) | the way of measuring the length of periods is used consistently for the |
| |
| |
(5) | If the accounting date in the tax year is 31st March or 1st, 2nd, 3rd or 4th April, |
| |
the person carrying on the trade may treat the basis period for the tax year as |
| |
ending on 5th April for the purpose of calculating the amount of the deduction. |
| 20 |
(6) | If a period used in calculating the amount of the deduction contains a 29th |
| |
| |
(a) | the accounting date in the tax year is 5th April, or |
| |
(b) | the basis period for the tax year is treated under subsection (5) as |
| |
| 25 |
| the person carrying on the trade may ignore the 29th February for the purpose |
| |
of calculating the amount of the deduction. |
| |
| |
Averaging profits of farmers and creative artists |
| |
221 | Claim for averaging of fluctuating profits |
| 30 |
(1) | This Chapter enables an individual (a “taxpayer”) to make a claim (an |
| |
| |
(a) | the taxpayer is, or has been, carrying on a qualifying trade, profession |
| |
or vocation (alone or in partnership), and |
| |
(b) | the taxpayer’s profits from it (“the relevant profits”) fluctuate from one |
| 35 |
| |
(2) | A trade, profession or vocation is a “qualifying trade, profession or vocation” |
| |
| |
(a) | it is farming or market gardening in the United Kingdom, |
| |
(b) | it is the intensive rearing in the United Kingdom of livestock or fish on |
| 40 |
a commercial basis for the production of food for human consumption, |
| |
| |
(c) | the taxpayer’s profits from it are derived wholly or mainly from |
| |
| |
|
| |
|
| |
|
(3) | For this purpose “creative works” means— |
| |
(a) | literary, dramatic, musical or artistic works, or |
| |
| |
| created by the taxpayer personally or, if the qualifying trade, profession or |
| |
vocation is carried on in partnership, by one or more of the partners personally. |
| 5 |
(4) | For the purposes of this Chapter references to the relevant profits of a tax year |
| |
are to profits before making any deduction for a loss made in any tax year. |
| |
(5) | If the taxpayer makes a loss in the qualifying trade, profession or vocation in a |
| |
tax year, the relevant profits of the tax year for the purposes of this Chapter are |
| |
| 10 |
222 | Circumstances in which claim may be made |
| |
(1) | An averaging claim may be made in relation to two consecutive tax years in |
| |
which a taxpayer is or has been carrying on the qualifying trade, profession or |
| |
| |
(a) | the relevant profits of one of the tax years are less than 75% of the |
| 15 |
relevant profits of the other tax year, or |
| |
(b) | the relevant profits of one (but not both) of the tax years are nil. |
| |
(2) | An averaging claim may be made in relation to a tax year which was the later |
| |
year on a previous averaging claim. |
| |
(3) | An averaging claim may not be made in relation to a tax year if an averaging |
| 20 |
claim has already been made in relation to a later tax year in respect of the |
| |
trade, profession or vocation. |
| |
(4) | An averaging claim may not be made in relation to the tax year in which— |
| |
(a) | the taxpayer starts, or permanently ceases, to carry on the trade, profession or |
| |
| 25 |
(b) | in the case of a trade, profession or vocation within section 221(2)(c), it |
| |
begins or ceases to be a qualifying trade, profession or vocation. |
| |
(5) | An averaging claim must be made on or before the first anniversary of the |
| |
normal self-assessment filing date for the second of the tax years to which the |
| |
| 30 |
(6) | But see section 225(4) (extended time limit if profits adjusted for some other |
| |
| |
223 | Adjustment of profits |
| |
(1) | If a taxpayer makes an averaging claim, the amount taken to be the taxpayer’s |
| |
profits of each of the tax years for which the claim is made is adjusted in |
| 35 |
accordance with this section. |
| |
(2) | But this is subject to paragraph 3 of Schedule 1B to TMA 1970 (claim given |
| |
effect in the second of the two tax years). |
| |
| |
(a) | the relevant profits of one of the tax years are 70% or less of the relevant |
| 40 |
profits of the other tax year, or |
| |
(b) | the relevant profits of one (but not both) of the tax years are nil, |
| |
|
| |
|
| |
|
| the amount of the adjusted profits of each of the tax years is the average of the |
| |
relevant profits of the two tax years. |
| |
(4) | If the relevant profits of one of the tax years— |
| |
(a) | are more than 70%, but |
| |
| 5 |
| of the relevant profits of the other tax year, the amount of the adjusted profits |
| |
of each of the tax years is calculated as follows, so as to reduce the variation |
| |
| |
| |
| Calculate the amount of the adjustment by applying the formula—![equation: cross[string["(D"],plus[rparen[num[3.0000000000000000,"3"]],minus[id[cross[char[
P],num[0.7500000000000000,"0.75"]]]]]]](missing.gif) |
| 10 |
| |
D is the difference between the relevant profits of the two tax years, and |
| |
P is the relevant profits of the tax year of which those profits are higher. |
| |
| |
| Add the amount of the adjustment to the relevant profits of the tax year of |
| 15 |
which those profits are lower. |
| |
| The result is the amount of the adjusted profits of that tax year. |
| |
| |
| Subtract the amount of the adjustment from the relevant profits of the tax year |
| |
of which those profits are higher. |
| 20 |
| The result is the amount of the adjusted profits of that tax year. |
| |
| |
(1) | The adjusted profits are taken to be the relevant profits of the tax years to which |
| |
the claim relates for all income tax purposes, including the further application |
| |
| 25 |
| |
(a) | subsection (3) of this section and section 225(2), and |
| |
(b) | paragraph 3 of Schedule 1B to TMA 1970. |
| |
(3) | If the relevant profits of one of the tax years are nil, this Chapter does not |
| |
prevent the taxpayer from obtaining relief under the Income Tax Acts for a loss |
| 30 |
made by the taxpayer in the tax year in question or any other tax year. |
| |
(4) | A claim by the taxpayer for relief under any other provision of the Income Tax |
| |
Acts for either of the tax years to which an averaging claim relates (“the other |
| |
| |
(a) | is not out of time if made on or before the last date on which the |
| 35 |
averaging claim could have been made, and |
| |
(b) | if already made, may be amended or revoked on or before that date. |
| |
| |
(a) | references to a claim include an election or notice, and |
| |
(b) | if the other claim is made in a return, the reference to amending or |
| 40 |
revoking the other claim is to amending the return by amending or |
| |
omitting the other claim. |
| |
|
| |
|
| |
|
(6) | For provision determining in which tax year a claim, amendment or revocation |
| |
made as a result of subsection (4) has effect, see paragraph 4 of Schedule 1B to |
| |
TMA 1970 (claim, amendment or revocation given effect in the second of the |
| |
| |
225 | Effect of later adjustment of profits |
| 5 |
(1) | This section applies if, after the taxpayer has made an averaging claim, the |
| |
relevant profits in either or both of the tax years to which the claim relates are |
| |
adjusted for another reason. |
| |
(2) | The averaging claim is ignored. |
| |
(3) | But this does not prevent a further averaging claim from being made in relation |
| 10 |
to the taxpayer’s profits as adjusted for the other reason. |
| |
(4) | A further averaging claim is not out of time as long as it is made on or before |
| |
the first anniversary of the normal self-assessment filing date for the tax year |
| |
in which the adjustment for the other reason is made. |
| |
| 15 |
| |
| |
226 | Professions and vocations |
| |
The provisions of this Chapter apply to professions and vocations as they |
| |
| 20 |
Adjustment on change of basis |
| |
227 | Application of Chapter |
| |
(1) | This Chapter applies if— |
| |
(a) | a person carrying on a trade changes, from one period of account to the |
| |
next, the basis on which profits of the trade are calculated for income |
| 25 |
| |
(b) | the old basis accorded with the law or practice applicable in relation to |
| |
the period of account before the change, and |
| |
(c) | the new basis accords with the law and practice applicable in relation |
| |
to the period of account after the change, |
| 30 |
| but does not apply to income which is charged in accordance with section 832 |
| |
(relevant foreign income charged on the remittance basis). |
| |
(2) | The practice applicable in any case means the accepted practice in cases of that |
| |
description as to how profits of a trade should be calculated for income tax |
| |
| 35 |
(3) | A person changes the basis on which profits of a trade are calculated for income |
| |
tax purposes if the person makes— |
| |
(a) | a relevant change of accounting approach (see subsection (4)), or |
| |
(b) | a change in the tax adjustments applied (see subsections (5) and (6)). |
| |
|
| |
|
| |
|
(4) | A “relevant change of accounting approach” means a change of accounting |
| |
principle or practice that, in accordance with generally accepted accounting |
| |
practice, gives rise to a prior period adjustment. |
| |
(5) | A “tax adjustment” means any adjustment required or authorised by law in |
| |
calculating profits of a trade for income tax purposes. |
| 5 |
(6) | A “change in the tax adjustments applied”— |
| |
(a) | does not include a change made in order to comply with amending |
| |
legislation not applicable to the previous period of account, but |
| |
(b) | includes a change resulting from a change of view as to what is |
| |
required or authorised by law or as to whether any adjustment is so |
| 10 |
| |
228 | Adjustment income and adjustment expense |
| |
(1) | An amount by way of adjustment must be calculated in accordance with |
| |
| |
(2) | If the amount produced by the calculation is positive, it is treated as income |
| 15 |
and charged to income tax under this Chapter. |
| |
| It is referred to in this Chapter as “adjustment income”. |
| |
(3) | If the amount produced by the calculation is negative, a deduction is allowed |
| |
for it in calculating the profits of the trade. |
| |
| It is referred to in this Chapter as an “adjustment expense”. |
| 20 |
(4) | This section is subject to section 234 (no adjustment for certain expenses |
| |
previously brought into account). |
| |
| |
(1) | Tax is charged under this Chapter on the full amount of any adjustment |
| |
income arising in the tax year. |
| 25 |
| |
(a) | sections 237 to 239 (which provide for spreading of adjustment |
| |
| |
(b) | Part 8 (foreign income: special rules). |
| |
| 30 |
The person liable for any tax charged under this Chapter is the person |
| |
receiving or entitled to the adjustment income. |
| |
231 | Calculation of the adjustment |
| |
The amount of the adjustment is calculated as follows. |
| |
| 35 |
Add together any amounts representing the extent to which, comparing the |
| |
two bases, profits were understated (or losses overstated) on the old basis. |
| |
| |
|
| |
|
| |
|
| | | | | | | Receipts which on the new basis would have been brought |
| | | | | into account in calculating the profits of a period of account |
| | | | | before the change, so far as they were not so brought into |
| | | | | | | 5 | | | Expenses which on the new basis fall to be brought into |
| | | | | account in calculating the profits of a period of account after |
| | | | | the change, so far as they were brought into account in |
| | | | | calculating the profits of a period of account before the |
| | | | | | | 10 | | | Deductions in respect of opening trading stock or opening |
| | | | | work in progress in the first period of account on the new |
| | | | | | | | | | (a) | are not matched by credits in respect of closing |
| | | | | trading stock or closing work in progress in the last |
| | 15 | | | period of account before the change, or |
| | | | | (b) | are calculated on a different basis that if used to |
| | | | | calculate those credits would have given a higher |
| | | | | | | | | | Amounts recognised for accounting purposes in respect of |
| | 20 | | | depreciation in the last period of account before the change, |
| | | | | so far as they were not the subject of an adjustment for |
| | | | | income tax purposes, where such an adjustment would be |
| | | | | required on the new basis. |
| | |
|
| 25 |
Then deduct any amounts representing the extent to which, comparing the two |
| |
bases, profits were overstated (or losses understated) on the old basis. |
| |
| |
| | | | | | | Receipts which were brought into account in a period of |
| | 30 | | | account before the change, so far as they would not have been |
| | | | | so brought into account if the profits had been calculated on |
| | | | | | | | | | Expenses which were not brought into account in calculating |
| | | | | the profits of a period of account before the change, so far as |
| | 35 | | | | | | | | (a) | would have been brought into account for a period of |
| | | | | account before the change if the profits had been |
| | | | | calculated on the new basis, and |
| | | | | (b) | would have been brought into account for a period of |
| | 40 | | | account after the change if the profits had continued to |
| | | | | be calculated on the old basis. |
| | |
|
|
| |
|
| |
|
| | | | | | | Credits in respect of closing trading stock or closing work in |
| | | | | progress in the last period of account before the change, so far |
| | | | | | | | | | (a) | are not matched by deductions in respect of opening |
| | 5 | | | trading stock or opening work in progress in the first |
| | | | | period of account on the new basis, or |
| | | | | (b) | are calculated on a different basis that if used to |
| | | | | calculate those deductions would have given a lower |
| | | | | | | 10 |
|
|
An amount so deducted may not be deducted again in calculating the profits |
| |
| |
Treatment of adjustment income and adjustment expense |
| |
232 | Treatment of adjustment income |
| |
(1) | Adjustment income is treated as arising on the last day of the first period of |
| 15 |
account for which the new basis is adopted. |
| |
(2) | But this is subject to sections 235 (cases where adjustment not required until |
| |
assets realised or written off) and 236 (change from realisation basis to mark to |
| |
| |
(3) | Adjustment income is treated for the purposes of Chapter 1 of Part 10 of ICTA |
| 20 |
(loss relief) as profits of the trade for the tax year in which tax is charged on it. |
| |
(4) | In the case of an individual whose income from the trade is— |
| |
(a) | earned income within section 833(4)(c) of ICTA, or |
| |
(b) | relevant UK earnings within section 189(2)(b) of FA 2004, |
| |
| adjustment income is similarly earned income or relevant UK earnings. |
| 25 |
233 | Treatment of adjustment expense |
| |
(1) | An adjustment expense is treated as an expense of the trade arising on the last |
| |
day of the first period of account for which the new basis is adopted. |
| |
(2) | But this is subject to sections 235 (cases where adjustment not required until |
| |
assets realised or written off) and 236 (change from realisation basis to mark to |
| 30 |
| |
Expenses previously brought into account |
| |
234 | No adjustment for certain expenses previously brought into account |
| |
(1) | This section applies if, as a result of a change of basis, expenses brought into |
| |
account before the change on the old basis would on the new basis be brought |
| 35 |
into account over more than one period of account after the change. |
| |
| |
(a) | no adjustment is made under this Chapter, and |
| |
|
| |
|