How to Claim HMRC Overlap Relief. Overlap profits can mean you have paid too much tax if you’re self-employed. There are certain circumstances that mean you can claim overlap relief to get back some of the extra tax you have paid.
Individuals who are self-employed can put themselves at risk of overlap profits and overpaying on their tax mainly because they:
- Choose an accounting period that does not match the HMRC basis period;
- Change their accounting period whilst they are trading.
HMRC allows self-employed business owners to claim back this overpaid tax, using the rules of Overlap Relief when:
- Changing accounting periods;
- Ceasing trade either by stopping the business or incorporating it.
Overlap Relief on Changing of Accounting Periods
However the amount of relief that can be claimed is restricted to:
- the number of days in the overlap period(s) to which the overlap profits relate; and
- the number of days by which the basis period for the relevant tax year (in which the change of accounting date occurs) exceeds 12 months.
An Example of Overlap Relief on Changing of Accounting Periods
You are a self-employed business owner and set your accounting period end date to 31 May each year when you started trading on 1 June 2014.
Here are your basis periods and your profits:
|Tax Year||Basis Period||Profits|
|2014/2015||1 June 2014 to 5 April 2015||£12,000|
|2015/2016||1 June 2014 to 31 May 2015||£15,000|
|2016/2017||1 June 2015 to 31 May 2016||£18,000|
|2017/2018||1 June 2016 to 30 November 2017 (18 months)||£25,000|
|2018/2019||1 December 2017 to 30 November 2018||£19,000|
as you can see you have to include profits from 1 June 2014 to 5 April 2015 in your tax return and pay tax twice on them.
You decide to change your accounting period from 31 May to 30 November in the tax year 2017/2018.
The overlap relief that you can claim in 2017/2018 is restricted because the basis period exceeds 12 months by 183 days so we must restrict overlap relief by this amount.
You can claim relief of £6,016 (£10,126 * 183/308).
How to Claim Overlap Relief
You can claim overlap relief on your tax return for 2017/2018 by setting this against your taxable profits.
This leaves a remaining amount of overlap relief of £4,109 which you can use on cessation of her business.
Overlap Relief On Cessation of Business
Any overlap relief not used can be claimed in the tax year that a business ceases trading.
This means across the life of her business the amount of chargeable profits exactly matches the number of days she has traded for.
An Example of Overlap Relief On Cessation of Business
Following on from the example above, you have remaining overlap profits of £4,109.
You can claim this final amount of overlap relief in the final self-employment section you file for your business in your self-assessment tax return.
The amount of £4,109 is set against the final profits the business declares.
Updated 28 May 2019
Anita is a Chartered Accountant with over a decade of experience taking self employed business owners from financially confused to business savvy.
She is the creator of the ‘Go Self Employed’ website, which her corner on the internet where she makes self employment less terrifying.