In business at the 5 April 1996 - and still going strong
August 2005
When self assessment was introduced, way back in 1996, the commencing provisions produced a strange result.
If your year end was set to be any month other than the 31 March or the 5 April, then a proportion of your profits "overlapping" the tax year end were actually taxed twice. This created a relief called "overlap relief" which you will be able to claim when you stop trading.
Two problems may arise!
1. If your profits now are much lower than they were in 1996-97, or
2. If your profits now are much higher than they were in 1996-97.
Profits are now much higher
If your profits are now higher, when you stop trading the deduction for overlap relief will have a less than proportionate affect on your final years tax bill. The outcome may be a larger than expected payment due to Her Majesty's Revenue and Customs.
Profits are now much lower
In this case the deduction of overlap relief from your final years profits may turn your final assessment into a terminal loss. Looking good as there is no tax to pay.
But what if you can't carry the losses back and use them to reduce tax in earlier years?
In this case the notional double assessment of profits in the 1996-97 tax year will become a permanent double taxation of profits!
Possible solutions.
We can help you plan your run down to cessation of trade and perhaps organise a pre-cessation change of accounting date, which may mitigate the effects of overlap relief on close down. If a higher tax bill looks inevitable, we can help you plan for the "rainy day" - to save in advance and have enough reserves to cover the bill.
So if you are thinking of scaling down your business now that you are getting older, or otherwise contemplating a cessation of trade, then call us now. The best way to minimise any potential damage is to plan for the most effective deployment of overlap relief and maximise any strategic opportunities that you may still have. Once you have stopped trading planning opportunities may be lost!
