The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:
For restrictions relating to losses incurred by sole traders using the simplified cash basis, see the Eligibility for the simplified cash basis guidance note.
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 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 incurred by ongoing trades (ie trades not in the first four years of trading or in the 12 months to cessation).
For a comparison of the various loss relief claims, see: Table ― trading loss relief summary.
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:
total income of the year of loss or the preceding year (a temporary extension of the loss carry back rules is available for losses arising in the 2020/21 and 2021/22 tax years)
current year or preceding year capital gains, to the extent that losses cannot be relieved against current or prior year total income, and
future profits arising from the same trade
Relief for losses in the opening or closing years of a business are dealt with in the Sole trader loss relief ― opening years and Sole trader losses on cessation 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: Summary ― self-employed trading losses.
HMRC has published a toolkit entitled Income tax losses, which aims to
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