Annex 1: Minor changes in the law made by the Act: Change 57: Overlap profit (calculating a deduction): to allow the taxpayer to disregard 29 February when there is a change of accounting date to a date late in the tax year: section 220
This change, in section 220(6), allows the taxpayer to disregard 29 February in calculating a deduction for overlap profit when there is a change of accounting date to a date falling on 31 March to 5 April inclusive.
It is normally the case that, in any year where overlap relief is due, a taxpayer has the same number of days’ overlap relief as there are days between his or her accounting date and 5 April.
As a result, at a change of accounting date to 5 April the overlap profit should be relieved in full under the source legislation in section 63A(1) of ICTA. But when 29 February falls in either the overlap period or the basis period given by section 62(2)(b) of ICTA, section 63A(1) of ICTA does not give the correct result. An adjustment is then necessary on cessation under section 63A(3) of ICTA.
Change 57 gives statutory effect to the practice described in paragraph 71155 of the Business Income Manual. Section 220(6)(a) allows the taxpayer to disregard 29 February in this case and the overlap relief adjustment to be made in full.
Change 55 gives statutory effect to the practice whereby changes of accounting date to dates from 31 March to 4 April inclusive may be treated as if made to 5 April. It would be illogical not to align Change 57 with that Change. So section 220(6)(b) allows taxpayers to disregard 29 February when the change is to one of those earlier dates.
This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.