Mismatch of losses

In these difficult economic times, it is important to maximise the benefit of any loss relief claims made on behalf of clients.

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. 

This situation can arise when trading losses are claimed against non-trading income in any of the following ways:

• against general income in the year of loss and/or the preceding tax year; ITA 2007, s64;
• an extension to a loss relief claim under ITA 2007, s64 to include relief against capital gains; TCGA 1992, s261B;
• a carry back of losses incurred in the first four tax years of a new business against income of the preceding three tax years; ITA 2007, s72.

Where any trading losses are so relieved, a separate memorandum of the unutilised losses carried forward should be kept 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 (see HMRC Manuals NIM24610).

This principle is illustrated in ***this example.

Employment losses relieved against trading income

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).

Further guidance on personal tax trading losses may be found ***elsewhere on our website.