A profitable business will pay tax on its profits but when times are not so good it will need to ensure that any loss relief available is claimed. This will often be of paramount importance for the cash flow of the business and could mean the difference between survival and failure.
It is therefore important to be aware of the different ways in which trading losses of sole traders and trading partners can be relieved. The following table summarises the reliefs available with links to worked examples and the relevant sections of the relevant tax legislation.
| Types of loss | Year of loss | Earlier years | Subsequent years |
|---|---|---|---|
| Trading losses generally. | Against total income from all source. ITA 2007, s64 HMRC Manuals: BIM75410 May be extended to include set off against capital gains once all taxable income extinguished. TCGA 1992, s261B; HMRC Manuals: BIM75420 | Against total income from all sources in the preceding tax year. ITA 2007, S64 HMRC Manuals: BIM785410 May be extended to include set off against capital gains once all taxable income extinguished. TCGA 1992, s261B; HMRC Manuals: BIM75420 | Against profits of the same trade. ITA 2007, s83 HMRC Manuals: BIM75500 |
When making a claim under ITA 2007, s64, the taxpayer may claim to set off the losses against either or both tax years.
| Types of loss | Year of loss | Earlier years | Subsequent years |
|---|---|---|---|
| Trading losses incurred in first four tax years of trade. | Against total income from all source. ITA 2007, s64 May be extended to include set off against capital gains once all taxable income extinguished. TCGA 1992, s261B; HMRC Manuals: BIM75420 | Against total income from all sources in the preceding tax year. ITA 2007, S64 May be extended to include set off against capital gains once all taxable income extinguished. TCGA 1992, s261B; HMRC Manuals: BIM75420 plus: May be set off against total income in the preceding three tax years, prior to the tax year of loss on a FIFO basis. ITA 2007,s72 HMRC Manuals: BIM75450 May not be extended to include capital gains | Against profits of the same trade. ITA 2007, s83 HMRC Manuals: BIM75500 |
| Types of loss | Year of loss | Earlier years | Subsequent years |
|---|---|---|---|
| Terminal Loss Relief (losses arising in final 12 months of trade). | Against all profits of the same trade assessable in the final tax year. ITA 2007, s89 HMRC Manuals: BIM75480 | Unrelieved terminal losses against profits of the same trade assessable in the three preceding tax years on a LIFO basis. ITA 2007, S89 HMRC Manuals: BIM75420 | N/A |
| Types of loss | Year of loss | Earlier years | Subsequent years |
|---|---|---|---|
| Unrelieved trading losses of a sole trade on incorporation | Against income (including remuneration, rental income and dividends) from a company to which the business which made the losses is transferred. ITA 2007, s86 HMRC Manuals: BIM75500 | N/A | Against income (including remuneration, rental income and dividends) from a company to which the business which made the losses is transferred. ITA 2007, s86 HMRC Manuals: BIM75500 |
HMRC manuals
HMRC manuals provide useful reference on calculating and utilising trading losses.
Mismatch of losses for income tax and class 4 NIC purposes
It is often overlooked that, when trading losses are relieved against sources of income other than trading income, or indeed capital gains, this will cause a mismatch between the amount of losses carried forward for income tax and class 4 national insurance purposes.
Where losses are claimed under ITA 2007, s64 or s74 and/or extended by a claim under TCGA 1992, s261B, separate memoranda should be kept of the unutilised losses for income tax and class 4 NIC purposes as the amount of losses available for income tax relief under ITA 2007,s83 and for Class 4 NIC under SSBCA 1992, Sch 2, Para 3(3)(4)will differ.
NB: It is also worth noting that same principle applies, but in reverse, where a taxpayer makes a claim for employment losses against general income under ITA 2007, s128 and these are relieved wholly or partially against trading income (which may also be extended to include set off against capital gains under TCGA 1992, s261B).
Temporary enhanced loss carry back relief 2008/09 and 2009/10
Finance Act 2009, Schedule 6 contained provisions to extend the relief available for losses incurred in the 2008/09 and 2009/10 tax years. It enabled trading losses of up to £50,000 per year of loss to be carried back against profits of the same trade for up to three earlier years.
This is now becoming of historic interest only but HMRC guidance on this and an example of how the relief works is available.
Time limits for making loss relief claims
In all cases, a claim for loss relief must be made by the one year anniversary of the normal filing date of the tax return for the loss-making year, eg: a claim for 2010/11 losses would need to made by 31 January 2013.
