Following an announcement in the March 2015 budget, a consultation was published in July 2015 inviting discussion and comment on how averaging could be extended from two years to five.

Draft legislation was published in December 2015 which proposes the following changes:

  • Averaging can be claimed for a period of five consecutive years provided that the volatility condition is met.
  • To meet the volatility condition, one of the following conditions must be met:
    • Either, one of the following must be less than 75% of the other:
      • The average of the first four years’ profits
      • The last year’s profit
    • Or, the profits of one or more of the five tax years to which the claim relates must be nil (or a loss).
  • There will be a choice whether to use the five year or two year period.
  • Marginal relief will be abolished for those using the two year period.
  • When using a two year period, full averaging will be available if the difference between the two profits is at least 25% of the higher profit.

It is proposed that the new legislation will be effective for claims where the 2016/17 tax year is either the second or the fifth averaging year. 

The extension of averaging from two to five years will not be available for trades where profits are derived from creative works.