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This guidance note explains the process of averaging of profits which is available for certain businesses with fluctuating profit levels caused by external factors and allows them to smooth their tax payments.

For certain taxpayers carrying on specified trades which are notoriously subject to widely fluctuating profit levels, a relief is available which aims to average taxable profits in consecutive years in order to reduce the overall liability to income tax and Class 4 national insurance contributions (NIC). For example, farming income is dependent on two uncontrollable factors: the weather and market prices. Due to these factors, farming income is unpredictable. The income of creative artists can be similarly unreliable.

Averaging seeks to provide a more predictable tax liability than that originally calculated. For example, it allows farmers to smooth out the effect of poor harvests, by averaging their taxable income between one or more tax years. The mechanics of the calculations are considered below.

Averaging claims have no effect on the level of trading income for the purposes of tax credits. The profit used for tax credits