Overlap profit is a term used to describe a part of a basis period that has been taxed twice. An overlap will nearly always occur in the second year of trading. If an account period end date of 31st March or 5th April is selected, no overlap profit will arise.
An overlap will also arise in some cases when there is a change of accounting date. Overlap profit is based on the profits after deducting capital allowances.
The overlap is recorded in two elements:
For example; if a trade commences on 1/7/96 with the first accounting period ending 30/6/97 showing a profit of 10,000 after capital allowances:
|1996-97||1/7/96 to 5/4/97||270/365 x £10,000||7,643||n/a|
|1997-98||1/7/96 to 30/6/97||10,000||10,000||279 days, 7,643|
Overlap profit is computed and stored automatically provided that a computation has been produced for the year in which the overlap arises. If the overlap occurred in 1994-95 or 1995-96, the details must be entered manually.
There is a special transitional overlap profit that applies to businesses that started trading before 6/4/94 and are still trading at 6/4/97. This may be overridden by the Revenue if the trade ceases in y/e 5/4/98 or 5/4/99 and they apply the s63 election to have the penultimate and anti-penultimate years taxed on a strict actual basis.
Overlap relief is given in the closing year or when there is a long basis period on change of accounting date.