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B5.326 Intellectual property—averaging of fluctuating profits

An individual whose business consists of personally creating artistic works can, where the necessary conditions are met, make a claim to average the profits of two consecutive years. ¹. A claim allows the taxpayer to benefit from the evening out of their taxable profits from a business which is particularly volatile, where profits will often fluctuate widely. Averaging cannot be claimed where profits are calculated using the cash basis for unincorporated businesses (see B2.111)².

Under the rules, an individual can make an averaging claim if their profits from a qualifying trade, profession or vocation (called 'relevant profits') fluctuate from one tax year to the next³. Relevant profits of a tax year for this purpose are profits before making any deduction for a loss made in a tax year⁴. If the taxpayer makes a loss in the qualifying trade etc in a tax year, the relevant profits for these purposes are nil⁵.

'A qualifying trade, profession or vocation' is one whose profits