Overlap Profits and Relief Everything you need to know about overlap profits

Overlap profits affects self-employed people who report their income and expenses on their tax return in a different period to the tax year.

overlap profits

Overlap profits affects self-employed people who report their income and expenses on their tax return in a different period to the tax year. By doing this sole traders can be taxed twice and then claim the overpayment back using the rules of overlap relief. To do this you need to either stop being self-employed or to change your accounting period.

overlap profits and relief

What are Overlap Profits?

Overlap profits happen when someone is self employed but chooses an accounting period different to the HMRC basis period. The HMRC basis period is 6 April to 5 April of the following year. HMRC taxes everyone on the same time frame regardless of the accounting period they choose in order to make it fair for all. When the basis period and the accounting period are not the same overlap profits can arise.

How to change accounting date

You do not need to ask HMRC for permission to change your accounting date but you must follow these rules:

  • Notify HMRC of changes in the tax return.
  • The first accounts for the new date must not be more than 18 months.
  • If you have changed your accounting date within the last 5 years you must give HMRC a valid reason for the change. Any changes must be for genuine business reasons.
profits and relief

How to avoid Overlap Profit

The easiest way to avoid overlap profit is to choose an accounting period which matches that of HMRC’s tax year. It should end on either 5th April or 31st March.

What is Overlap Relief

Overlap relief is a tax relief for anyone who has paid double tax on overlap profits. Self employed business owners (sole traders) can claim this overpaid tax back under HMRC’s rules. To reclaim this tax it needs to have occurred via a change in accounting period or by ceasing trade either by stopping the business or incorporating it.

Overlap relief from changing accounting periods

Overlap relief can be used as a deduction against taxable profits if the accounting period has changed so that the accounting year becomes longer than 12 months. The amount of tax relief is restricted to the number of days in the overlap period to which the overlap profits relate and the number of days by which the accounting period exceeds 12 months.

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