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How do overlap profits/relief work?

Article ID: 2171
Last updated: 10 Mar, 2015

Overlap profits can result when the year end date doesn’t line up with the tax year.

If there is an overlap, this means that in the first two tax returns that you submit online to HMRC, you will pay tax twice on the overlap amount. The following example shows you how this works.

In this example, the business incorporated on 1 August and the date chosen for year end is 31 December.

         

The first return (Tax Year 1) that you submit would contain accounts from 1 August (01/08) to 5 April (05/04). This would require you to pro rata the information from the 17 months down to eight months and five days.

The second return (Tax Year 2) that you submit would contain accounts from 1 August to 31 December (31/12).

The portion of the accounts from 1 August to 5 April is therefore taxed twice and this is what is known as the overlap profit, or relief.

This relief is used to reduce the profits on the final tax return when the business ceases trading or if the accounting period changes.

Article ID: 2171
Last updated: 10 Mar, 2015
Revision: 4
Views: 24815
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folder Tax Return Production -> SA100 Individual Return