With the self-assessment deadline fast approaching, this article considers the way in which trading losses may be utilised for tax purposes.
A profitable business will pay tax on its profits but when times are not so good it will need to ensure that any loss relief available is claimed. This will often be of paramount importance for the cash-flow of the business and could mean the difference between survival and failure.
It is therefore important to be aware of the different ways in which trading losses of sole traders and trading partners can be relieved. The following table summarises the reliefs available with links to worked examples and the relevant sections of the relevant tax legislation.
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Type of loss |
Year of loss |
Earlier years |
Subsequent years |
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Trading losses generally. |
Against total income from all sources. ITA 2007, s64; HMRC Manuals BIM75410
May be extended to include set off against capital gains once all taxable income extinguished. HMRC Manuals BIM75420 |
Against total in come from all sources in the preceding tax year. ITA 2007, s64; HMRC Manuals BIM75410 May be extended to include set off against capital gains once all taxable income extinguished. HMRC Manuals BIM75420 |
Against profits of the same trade. ITA 2007,s83; HMRC Manuals BIM75500 |
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When making a claim under ITA 2007, s64, the taxpayer may claim to set off the losses against either or both tax years. |
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Trading losses incurred in first four tax years of trade. |
Against total income from all sources. ITA 2007, s64 May be extended to include set off against capital gains once all taxable income extinguished. HMRC Manuals BIM75420 |
Against total in come from all sources in the preceding tax year. ITA 2007, s64 May be extended to include set off against capital gains once all taxable income extinguished. HMRC Manuals BIM75420 plus: May be set off against total income in the preceding three tax years, prior to the year of loss on a FIFO basis. ITA 2007, s72 HMRC Manuals BIM75450
(May not be extended to include capital gains.) |
Against profits of the same trade. ITA 2007, s83; HMRC Manuals BIM75500 |
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Terminal loss relief (losses arising in final 12 months of trade). |
Against profits of the same trade assessable in the final tax year. ITA 2007, s89; HMRC Manuals BIM75480 |
Unrelieved terminal losses against profits of the same trade assessable in the three preceding tax years on a LIFO basis. ITA 2007, s89; HMRC Manuals BIM75480 |
N/A |
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Unrelieved trading losses of a sole trade on incorporation |
Against income (including remuneration, rental income and dividends) from a company to which the business which made the losses is transferred. ITA 2007, s86; HMRC Manuals BIM75500 |
N/A |
Against income (including remuneration, rental income and dividends) from a company to which the business which made the losses is transferred. ITA 2007, s86; HMRC Manuals BIM75500 |
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HMRC manuals
HMRC manuals provide useful reference on calculating and utilising trading losses. Access the relevant chapter here.
Mismatch of losses for income tax and class 4 NIC purposes
It is often overlooked that, when trading losses are relieved against sources of income other than trading income, or indeed capital gains, this will cause a mismatch between the amount of losses carried forward for income tax and class 4 national insurance purposes. Where losses are claimed under ITA 2007, s64 or s74 and/or extended by a claim under TCGA 1992, s261B, separate memoranda should be kept of the unutilised losses for income tax and class 4 NIC purposes as the amount of losses available for income tax relief underITA 2007,s83 and for Class 4 NIC under SSBCA 1992, Sch 2, Para 3(3)(4) will differ. See HMRC Manuals NIM24610.
NB: It is also worth noting that same principle applies, but in reverse, where a taxpayer makes a claim for employment losses against general income under ITA 2007, s128 and these are relieved wholly or partially against trading income (which may also be extended to include set off against capital gains under TCGA 1992, s261B).
Time limits for making loss relief claims
In all cases, a claim for loss relief must be made by the one year anniversary of the normal filing date of the tax return for the loss-making year, eg: a claim for 2010/11 losses would need to made by 31 January 2013.
HMRC will accept late claims in certain circumstances
Restriction on relief for trading losses
Legislation was implemented by Finance Act 2013 to place a limit on certain ‘income tax reliefs’ that an individual may claim. Trading losses are included within the list of restricted reliefs.
The limit applies with effect from 6 April 2013 to certain reliefs which, prior to 2013/14, had been unrestricted. The new restriction limits the tax relief available on the affected reliefs (which are considered below) to the greater of:
• 25% of the individuals adjusted total income (total income less pension contributions) for the tax year, and
• £50,000.
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Article shared from ACCA In Practice