Home > Agents > FABs – Frequent Agent Blindspots. #1 – Overlap relief

FABs – Frequent Agent Blindspots. #1 – Overlap relief

I have lost track of the number of times I’ve looked back through a client file to find errors or omissions by a predecessor (or myself – I’m as guilty as anyone): we’re all human and therefore fallible. Over time patterns emerge, and there are a few key areas that are persistently either ignored or not followed up.

Overlap relief is one such area. When a taxpayer first starts up in self-employment, during the first year or two some profits are effectively charged to tax and National Insurance twice due to the rules over basis periods (unless 5 April is the accounting date): these are overlap profits. On cessation final profits are reduced by overlap profits to bring a pleasing symmetry to the taxpayer’s affairs. If the accounting date changes along the way, additional overlap profits can be created or relief claimed.

There is space on the tax return* to include overlap profits brought forward, used, and carried forward. Unfortunately, these figures can be omitted for a number of reasons:

  • some software packages, particularly in the late 1990s, didn’t complete these boxes
  • this information can be lost when transferring between different accountants
  • the amounts may never have been calculated, and so the boxes may never have been filled in in the first place
  • the boxes may have been totally ignored, as any amount of overlap profits brought forward, accrued or carried forward does not alter the tax liability for the year.

In many cases the first thought relating to overlap profits is on cessation, usually long after commencement, and often beyond the recommended seven-year timespan for keeping old files.

So, what to do if you’ve got no entries in the key boxes? Well, the first stop is any old client files you may have. Businesses commencing after 5 April 1994 generated overlap profits in the ‘modern’ way, so you’ll need the first tax return as a minimum: remember, 1994/95 & 1995/96 are pre-SA so get your fedora and bullwhip. Older businesses generated their overlap relief (technically transitional relief) in the period to 5 April 1997: head for the 1997/98 return for the required info.

If you’ve got efficient filing clerks and a suspiciously empty archive room, then amazingly calling HMRC themselves may be your best bet, although you may need a technical officer. They should be able to help you with commencement dates and providing the profits information from the commencement year or 1997/98, although they may have to send you it hard copy rather than tell you over the phone.

Once you have the required dates and profits, you should be able to calculate the overlap profits themselves. You can then reduce the profits by this and – hey presto! – hopefully a much reduced liability and a happy client.

If you’ve looked back through your file and seen this was missed a few years ago, don’t despair: HMRC’s shiny new overpayment relief (the replacement for error or mistake relief) should come to your rescue. Get the info, do the calculations, and get something in writing in to HMRC PDQ: they should help you to get things right.

* Overlap used and carried forward amounts are at boxes 68 & 69 of the full self-employment pages, and boxes 12 & 13 of the partnership pages. On 2006/07 returns and earlier, overlap brought forward, used and carried forward amounts are at boxes 3.78-80 on the self-employment pages, and boxes 4.9-11 of the partnership pages.

  1. Paul
    November 23, 2012 at 15:27

    We have a new client where we suspected overlap relief was available. The previous accountant did not know, it was the accountant before him. So we asked HMRC and they kindly gave us the figure – nearly 40k. Another point is that in some trades, especially involving manual work, profits decline as retirement approaches, so that the relief cannot be used up, even with the 3 year carry back. So engineer a cessation while sufficient profits exist.

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