Trading losses and how to utilise them

A review of the options available for utilising trading losses

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 cashflow 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 section summarises the reliefs available; the relevant sections of the tax legislation and HMRC manuals are available via the 'Related links' section on this page.

HMRC manuals

HMRC manuals provide useful reference on calculating and utilising trading losses. Access the relevant chapters in the 'Related links' section on this page. 

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 contributions (NIC) 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 Social Security Contributions and Benefits Act 1992, Sch 2, Para 3(3)(4) will differ.

See HMRC Manuals NIM24610, via the 'Related links' section on this page.

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).

Restriction on relief for trading losses

Legislation was implemented by the Finance Act 2013 to place a limit on certain 'income tax reliefs' that an individual may claim.  Trading losses are included within the list of restricted reliefs.

The limit applies with effect from 6 April 2013 to certain reliefs which, prior to 2013/14, had been unrestricted.

The new restriction limits the tax relief available on the affected reliefs (which are considered below) to the greater of:

• 25% of the individuals adjusted total income (total income less pension contributions) for the tax year, and

• £50,000.

Time limits for 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 2013/14 losses would need to made by 31 January 2016.

HMRC will accept late claims in certain circumstances