When does a deduction for overlap profit arise on a change of accounting date under ITTOIA 2005 section 220?

A deduction for overlap profit arises when a trader changes their accounting date during a tax year and the resulting basis period exceeds 12 months. The deduction ensures that no more than 12 months' worth of trading profits are assessed to income tax in that particular tax year under United Kingdom law.

How is the overlap profit deduction calculated under the six-step process in section 220?

First, total all overlap profit from overlap periods ending before the tax year end. Second, subtract previous deductions to find remaining overlap profit. Third, calculate remaining overlap days. Fourth, divide remaining profit by remaining days. Fifth, find the excess days beyond the tax year. Sixth, multiply one day's overlap profit by excess days.

Can a trader use an alternative method instead of counting days to calculate the overlap profit deduction?

Yes, a trader may use an alternative method of measuring period lengths instead of counting individual days, provided it is reasonable and applied consistently for the purposes of the trade. This choice is made by the trader, not by HMRC, giving flexibility in how the overlap profit deduction is computed.

How does section 220 treat accounting dates falling between 31 March and 4 April?

If the new accounting date falls on 31 March or between 1 and 4 April, the trader may treat the basis period as ending on 5 April for the overlap profit calculation. This simplification avoids minor adjustments and always benefits the trader. A leap year adjustment may also apply if 29 February falls within a relevant period.

Income Tax (Trading and Other Income) Act 2005 section 220

Deduction for overlap profit on change of accounting date

Section 220 explains how to calculate a deduction for overlap profit when a trader changes their accounting date during a tax year, resulting in a basis period longer than 12 months.

When a change of accounting date produces a basis period exceeding 12 months, a deduction for overlap profit must be made to ensure no more than 12 months' profits are taxed in that year
The deduction is calculated using a six-step process: total up remaining overlap profit and remaining overlap days, work out a daily rate, then multiply that rate by the number of excess days in the basis period beyond the tax year
Traders may use an alternative reasonable and consistent method of measuring period lengths instead of counting days, and may treat accounting dates falling between 31 March and 4 April as equivalent to 5 April
Where a relevant period includes 29 February and the accounting date falls between 31 March and 5 April inclusive, the trader may choose to ignore that extra leap year day in the calculation

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