Sole trader losses ― established trades

By Tolley
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The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Sole trader losses ― established trades
  • Introduction
  • Is the loss allowable?
  • Relief against net income of the year of loss or preceding year
  • Set off of trading losses against capital gains
  • Carry forward of trading losses
  • Loss relief planning
  • Loss relief claims
  • Interaction with losses and Class 4 NIC

For restrictions relating to losses incurred by sole traders using the simplified cash basis, see the Simplified cash basis for small businesses guidance note.

Introduction

When a sole trader makes a loss, the trading income assessment (ie the taxable profit for the year) is nil. Losses are computed in the same way as profits. Loss relief is only available if the business is being run on a commercial basis with a view to realising a profit.

The trader may choose how the loss should be relieved by making appropriate loss relief claims.

For continuing trades, losses may be relieved against the following:

  • net income of the year of loss or the preceding year
  • current year or preceding year capital gains, and
  • future profits arising from the same trade

Losses in the opening or closing years of a business are dealt with in the Basis of assessment ― opening years and Basis of assessment ― closing years guidance notes.

As there are several options for relieving losses, careful planning is required to achieve the optimum position. A balance may be needed between relieving losses early and relieving losses at the highest possible tax rates. For a summary of loss relief options, see the Summary ― self-employed trading losses.

See also the Checklist ― sole traders loss relief.

Is the loss allowable?

Before considering the potential claims for loss relief, the first step is to establish that the loss is allowable. For a loss to obtain relief under the provisions discussed below, it must arise from a trade. Given that the loss has occurred within a continuing business, this should have been considered already, however, more detail on what constitutes a trade can be

More on Relief for trading losses: