How does section 223 of ITTOIA 2005 adjust profits when an averaging claim is made?

When a taxpayer makes an averaging claim under section 223, the actual profits for each tax year covered by the claim are replaced with a simple average. The relevant profits across all included tax years are added together and divided by the number of years, producing an equal adjusted figure for each year.

In which tax year is an averaging claim given effect under section 223?

Under paragraph 3 of Schedule 1B to the Taxes Management Act 1970, the averaging claim is given effect in the last of the relevant tax years. This means the adjustment is applied in the second year for a two-year claim or the fifth year for a five-year claim, affecting the taxpayer's self-assessment accordingly.

What happened to the tapering adjustment method previously in subsection (4) of section 223?

Subsection (4) previously provided a tapering calculation where profits differed by between 25% and 30%, applying a partial sliding-scale adjustment. This tapering method was repealed by the Finance Act 2016, leaving the simple averaging method in subsection (3) as the sole mechanism for adjusting profits under an averaging claim.

Can you give an example of how profit averaging works under section 223?

If a self-employed farmer earns £10,000 in Year 1 and £30,000 in Year 2 and makes a two-year averaging claim, the adjusted profit for each year is calculated as (£10,000 + £30,000) ÷ 2 = £20,000. Each year is then treated as having taxable profits of £20,000, smoothing the fluctuation.

Income Tax (Trading and Other Income) Act 2005 section 223

Adjustment of profits

Section 223 explains how profits are adjusted when a taxpayer makes an averaging claim, replacing each year's actual profits with an averaged figure across the relevant tax years.

When a taxpayer makes an averaging claim, the profits for each of the tax years covered by the claim are adjusted as set out in this section.
The adjusted profit for each tax year is calculated as the simple average of the relevant profits across all the tax years to which the claim relates.
The claim is given effect in the last of the two or five tax years, in accordance with Schedule 1B to the Taxes Management Act 1970.
Subsection (4), which previously provided a second, more complex tapering method of adjustment, has been repealed by the Finance Act 2016.

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