Losses in opening years of trade

By Tolley
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The following Personal Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Losses in opening years of trade
  • Introduction
  • Is the loss allowable?
  • Early trade losses relief
  • Carry forward of trading losses
  • Other forms of trading loss relief
  • Tax Return reporting
  • Class 4 national insurance position
  • No double counting of losses in the basis of assessment
  • Loss relief planning

Introduction

When a sole trader or partnership makes a loss, the trading income assessment (ie taxable profit for the year) is nil. Losses are generally computed in the same way as profits. Loss relief is only available where a business is run on a commercial basis with a view to realising profit. The loss relief claim(s) which are available depend on whether the trade has started within the last four years, is a continuing trade or the trade has ceased.

The trader or partner may then choose how the loss should be relieved by making any appropriate loss relief claim(s).

This guidance note concentrates on claims that can be made for trading losses arising in the first four years of the trade.

For a comparison of the various loss relief claims, see the Table ― trading loss relief summary.

HMRC has published a toolkit entitled Income tax losses , which aims to help reduce errors on Tax Returns. Use of HMRC's toolkits should be proof of reasonable care.

Early trade loss relief is included in the cap on unlimited income tax reliefs (see below).

Simplified cash basis

Unincorporated businesses with turnover of less than £150,000 (or £300,000 for universal credit claimants) can opt to use the simplified cash basis. These turnover thresholds apply from 2017/18 onwards. For the thresholds that applied between 2013/14 and 2016/17, see the Simplified cash basis for small unincorporated businesses guidance note.

ITTOIA 2005, ss 31A, 31B

While within the simplified cash basis, trading losses cannot be used against other income. Neither can trading losses be carried back to be utilised against profits from the same trade or against capital gains. Losses can only be carried forward and set against profits from the same trade under ITA 2007, s 83 (see below).

ITA 2007, s 75E

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