BIM73001 - Averaging: general introduction
Averaging is a special relief available to two classes of individual:
- Farmers and market gardeners (see BIM73101 onwards),
- Creators of literary or artistic works (see BIM73051 onwards).
The idea was first introduced in 1977 when new rules were
brought in to help farmers because of the fluctuations in their
profits caused by the weather and the increasing influence of world
market prices.
In 2001 the relief was extended to individuals who personally
create literary and artistic works. The relief replaced a previous
more complicated relief which was abolished.
There is an introduction to the relief in the SA Tax Return
Help Sheets:
- Farming and market gardening IR224.
- Creators of literary or artistic works IR234.
The way in which the relief operates is identical in each case.
Very briefly, claims are made in the return for the later year. The
profit for that year is adjusted to half the total profit for that
year and the previous year. In addition an adjustment in terms of
tax is made to the tax due for the later year. The amount of the
adjustment (which may be an increase or a decrease) is the amount
by which the tax and NIC for the previous year would have changed
if the profit for that year had been adjusted to the average
figure. The relief does not apply unless the profits for the two
years differ by more than 25% of the higher figure.
Averaging will only help if the top rate of tax or NIC is
different for each of the two years. For example:
- averaging will not help if people who pay the full amount of Class 4 NIC and whose top tax rate is 40% each year,
- averaging may help people who pay tax at the basic rate one year and higher rate the next,
- averaging may help people who are liable to tax one year but whose income falls so they are not liable the next.
The effect of the reliefs is identical but the law is not. That is because the rules on farmers’ averaging (in ICTA88/S96 and TMA70/SCH1B/PARA3) predate the Tax Law re-write project but those for creators of literary and artistic works (ICTA88/S95A, ICTA88/SCH4A) are in the new style. The two provisions are brought together under ITTOIA Chapter 16. You should consult the guidance on farmers’ averaging to see the effect of both reliefs.
