Sole trader loss relief ― opening years

Produced by Tolley

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

  • Sole trader loss relief ― opening years
  • Carry back of losses in opening years
  • Potential restrictions on availability of losses
  • Commerciality test
  • Simplified cash basis
  • Further restrictions on losses
  • Loss relief planning
  • Tax return reporting
  • Overlap losses
  • Class 4 national insurance position

Sole trader loss relief ― opening years

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) that are available depend on whether the trade has started within the last four years, is a continuing trade or the trade has ceased.

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.

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

Carry back of losses in opening years

Losses incurred in the course of carrying on a trade, profession or vocation in the first four years of trading can be relieved against the trader’s other income of the three tax years preceding the year of loss.

As an example, if a trade commences on 1 January 2021 (ie in 2020/21), the special loss relief will be available in respect of losses sustained in 2020/21, 2021/22, 2022/23 and 2023/24. Trading losses in each of these years can be carried back for three years.

Relief is not given automatically; a claim must be made by the first anniversary of 31

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