Sole trader losses on cessation

Produced by Tolley
Sole trader losses on cessation

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

  • Sole trader losses on cessation
  • Introduction
  • Simplified cash basis
  • Terminal loss relief
  • Making a claim for terminal loss relief
  • Post cessation losses
  • Losses remaining at incorporation

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.

The loss relief claim(s) that are available depend on whether the trade has started within the last four years, or is a continuing trade or the trade has ceased.

This guidance note concentrates on claims that can be made for trading losses in the 12 months prior to cessation 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.

Terminal loss relief is not included in the cap on unlimited income tax reliefs. This is because the anti-avoidance provision targets reliefs against total income rather than just against trading profits. For more information, see the Cap on unlimited income tax reliefs guidance note.

Simplified cash basis

Unincorporated businesses with turnovers 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.

Unlike other reliefs for trading losses, those within the simplified cash basis can claim terminal loss relief for losses in the last 12 months of trading.

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

Terminal loss relief

If a taxpayer’s trade, profession or vocation ceases and has incurred a ‘terminal loss’, then the loss can be deducted from any trading profits in the tax year of cessation and carried back to the three preceding tax years. Losses must be relieved against later years first (ie a last in / first out (LIFO) basis) and are offset against profits of the trade, profes

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