BIM73151 - Farmers' averaging: amendments to profits: reasons other than averaging: no averaging claim in place
In a situation where the option to elect for averaging was not
exercised and the profits for both or either of the years are
amended, for any reason other than the making of an averaging
claim, say after an enquiry, the impact of the averaging claim is
restricted to the amount of the adjustment to the profits.
If additions to returns are established but the time limit
for making an election has passed, a late election should be
admitted, but as demonstrated in the example below its effect is
restricted to the amount of the additions.
Example
Julie, a pedigree Texel sheep breeder did not claim averaging
for 2004-05 and 2003-04. An enquiry results, in 2008, in the
addition of £10,000 to her profits for 2004-05 which makes her
liable to higher rate tax. She claims averaging. The effect is as
follows:
| 2003-04 | 2004-05 | Totals | |
| Declared profits | £16,000 | £30,000 | £46,000 |
| Additions | £10,000 | ||
| Revised profits | £16,000 | £40,000 | £56,000 |
| Averaged profits | £28,000 | £28,000 | £56,000 |
Averaging cannot reduce the assessment for the later year below
£30,000, the amount originally declared. Strictly the
adjustment in terms of tax based on the circumstances of the
earlier year should nonetheless be computed by reference to
additional profits of £12,000 (£28,000 - £16,000).
By concession the adjustment in terms of tax applied to the 2004-05
return, is based on additional profits of £10,000 for 2003-04
rather than £12,000.
Had the figures for the two years been reversed the same
principle would have applied with the following result:
| 2003-04 | 2004-05 | Totals | |
| Declared profits | £30,000 | £16,000 | £46,000 |
| Additions | £10,000 | ||
| Revised profits | £40,000 | £16,000 | £56,000 |
| Averaged profits | £28,000 | £28,000 | £56,000 |
Without a restriction the adjustment in terms of tax to 2004-05
based on the circumstances of the earlier year would have been tax
on profits of £40,000 less tax on profits of £28,000.
But that would involve opening the figures originally
returned, so the £30,000 originally returned is used instead
of £28,000 and the addition for 2004-05 is restricted to
£10,000.
See
BIM73145 for a detailed example of
computing a giving the tax adjustment.
