SolvedBIM84220 | Averaging: example of a five year claim
From HM Revenue & Customs · Business Income Manual
A farmer has the following profits and would like to make an averaging claim in 2016/2017.
| Tax Year | Profits |
|---|---|
| 2012/2013 | £12,000 |
| 2013/2014 | £12,000 |
| 2014/2015 | £10,000 |
| 2015/2016 | £10,000 |
| 2016/2017 | £50,000 |
To check the volatility condition the farmer needs to compare the profits in 2016/2017 to the average of the profits in the preceding four years. That average is £11,000 so the volatility condition is met and on the assumption that all of the other criteria in BIM84100 are met, then an averaging claim can be made.
It is to be noted in this example that the profits for 2012/2013 to 2015/2016 have already been averaged with claims in 2013/2014 and 2015/2016. It is perfectly acceptable for a particular year to be averaged a number of times.
The averaging computation will look something like this.
| Tax Year | Profits | Averaged Profits |
|---|---|---|
| 2012/2013 | £12,000 | £18,800 |
| 2013/2014 | £12,000 | £18,800 |
| 2014/2015 | £10,000 | £18,800 |
| 2015/2016 | £10,000 | £18,800 |
| 2016/2017 | £50,000 | £18,800 |
Like in the example in BIM84210, any adjustment to tax and class 4 NIC for the years 2012/2013 to 2015/2016 will be made in 2016/2017. In this example that adjustment will be an increase, but this will be more than offset from the savings in a £31,200 reduction in profit in 2016/2017.
In this example as the volatility condition is also met for a two year averaging claim, the farmer could, as an alternative, chose to make a two year averaging claim instead.