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Following the death of her previous accountant, I have recently been appointed to act on behalf of a client who is self-employed and who has built up a successful business over the past 30 or so years. Her business accounts are still being prepared to a 30 April year end and I am in the process of preparing these and her tax return for 2018-19.
She has provided copies of her returns for the past six years, but I notice that there is no record of overlap relief brought forward. I was thinking of changing her accounting year end to 31 March, but because her profits are approaching six figures this would crystalise a substantial tax liability, especially if there is no overlap relief to reduce this.
I am now thinking of how I can best manage matters and reduce the impact of an eventual large liability on cessation – I think she is planning to retire in about ten years’ time when she is in her mid-60s.
First, should I take the line that there is no figure for relief so none can be claimed or could I include an estimate? The problem with that would be that we have very little idea of her profit level 20 or more years ago.
My other thought was whether I could gradually extend her accounting date in stages in a managed process by a month or two each year towards 31 March by the time she retires. Is that approach feasible?
Another possibility that occurred to me was whether, when she retired, she could keep the business going for another year or so with, say, one client and a very small profit. Would either idea count as tax avoidance in today’s climate?
Perhaps I am worrying unduly, but I hope readers can advise.
Query 19,455 – Consultant.
Reply by Bramble
HMRC will not generally assist with deciding the amount of overlap relief
It is not uncommon that the amount of overlap relief available is not recorded in the self-assessment tax returns. Most personal tax compliance software will be able to record (and calculate) the amount so it does appear each year. The lack of such a record is often down to a change in software, either when a firm changes its software provider or the client moves to a new adviser that uses different software; in each case, not all the client data is migrated to the new software and old records may have been destroyed over time.
Overlap relief is a mandatory deduction (ITTOIA 2005, s 220(2)) and one would hope that HMRC's systems would be able to provide taxpayers and their agents with the amount in cases for which they no longer have the relevant records. However, it is my understanding that HMRC will not generally assist in questions concerning the quantum of overlap relief available. As an aside, are advisers exposing themselves to legal and/or disciplinary action for not maintaining an ongoing record of overlap relief?
Consultant suggests assuming that no overlap relief is available or including an estimate. However, any estimate would have to be more of a 'guestimate' given there are no records from 20 or more years ago. Further, using an estimated figure would require box 20 on page TR8 of the SA100 to have an 'X' put in it if the tax return contains any provisional figure.
It is too late for 2018-19 now but, given that ITTOIA 2005, s 220(2) mandates a deduction, Consultant might have considered submitting the client's tax return by 30 September without a self assessment so that HMRC must calculate the tax computation. If no overlap relief was given by HMRC, Consultant could appeal the assessment on those grounds. However, Consultant and the client would need to be confident that some overlap relief is available and that the costs of an appeal justify it.
Consultant is also considering a gradual extension to the accounting date by a month or two each year so as to end up with a 31 March year end. There are, however, strict rules about changing the accounting date. In the client's case, ITTOIA 2005, s 216 and s 217 will apply since the change is after the third year of the business.
For the basis period for the year of change to end with the new accounting date, three conditions must be met (see the guidance in HMRC's Business Income Manual at BIM81045).
- The first accounts to the new date must not exceed 18 months.
- A notice of the change of accounting date must be given in the person's self-assessment tax return for the year of change and the return must be filed on time.
- If, in the previous five years, there has already been a change of accounting date that resulted in a change of basis period, then the latest change must be made for commercial reasons (see the guidance at BIM81050). Further, those reasons must be set out in the tax return referred to above.
If the conditions are met and the new accounting date is less than 12 months after the end of the basis period for the previous year, the basis period for the year of change is the 12 months ending with the new accounting date in that year.
If the conditions are met and the new accounting date is 12 months or more after the end of the basis period for the previous year, the basis period for the year of change begins immediately after the end of the basis period for the previous year and ends with the new accounting date.
For more information here, see examples 1 to 4 in HMRC’s Business Income Manual at BIM81060.
If the conditions are not met, the basis period for the year in which the change of accounting date takes place remains as the period of 12 months ending with the previous accounting date in that tax year. See example 5 and example 6 at BIM81060.
As for the client retiring but keeping the business going on a much smaller scale for a year or so, I do not see that as tax avoidance. It is not uncommon for individuals to wind down the level of their activities in the years approaching retirement before they decide to cease business altogether.
A closer look ...
Self-assessment tax returns and the use of estimated and provisional figures
In his question about overlap relief (see page 24) Consultant raises the question of using estimated figures in the absence of any record of the amount of relief which is (or may be) due to his client.
A taxpayer who has been issued with a tax return has an obligation to make a declaration that the tax return is to the best of their knowledge ‘correct and complete’ (see TMA 1970, s 8(2)). HMRC accepts that there will be cases where a taxpayer cannot be absolutely certain of a figure and therefore does permit the use of estimates.
HMRC’s Self-Assessment Manual at SAM121190 says:
‘Returns which include provisional or estimated figures should be accepted provided they can be regarded as satisfying the filing requirement.
- A provisional figure is one which the taxpayer/agent has supplied pending the submission of the final/accurate figure.
- An estimated figure is one which the taxpayer/agent wishes to be accepted as the final figure because it is not possible to provide an accurate figure, for example where the records have been lost. The taxpayer is not required to tick box 20 of the Finishing your tax return section of the return page TR 6 (or equivalent in a return for an earlier year) where estimated figures have been used.’
Consultant’s client falls into the latter category because records have been lost and therefore his client should not tick box 20. The First-tier Tribunal decision in Griffiths (TC7239) gives judicial support for the use of estimates.
The issue for Consultant in advising his client is whether he believes the client. There is a world of difference between a figure more or less plucked out of the air and a figure based on reasonable extrapolations from whatever information is available. That would include proper consideration of whether, in fact, overlap relief had been claimed on a previous change of accounting date.
There is no absolute legal requirement to refer to the fact that a figure is estimated when submitting a tax return but in these circumstances it is advisable to make a full disclosure to HMRC of the fact that the figure is estimated and include a narrative showing the basis on which the estimate has been prepared.
It is considered that in any enquiry into the return the client would be protected from a penalty for having failed to take reasonable care.
As a final word of warning against the overuse of estimated or provisional amounts, SAM121190 says: ‘Where it appears that a particular agent is filing a significant proportion of returns with provisional or estimated figures, you should inform the compliance manager.’
