If you are self employed or in partnership and you make a trading loss, you may be able to reduce your overall tax bill by offsetting that loss against the following:
a) other income in the current tax year (‘sideways’ loss relief)
b) other income in the prior tax year (‘carry back’ loss relief).
c) other income of the past 3 years, where the loss is incurred in the first 4 years of trading (early years relief)
d) income of the past 3 years, where the loss is incurred within 12 months of ceasing to trade (cessation relief).
e) future trading profits (‘carry forward’ relief)
f) capital gains (but only if there is no more income to offset the loss against)
To ensure that you make optimal use of your losses (eg, sideways, carry back, or carry forward) you, or your accountant, will need to consider the following issues:
a) how much other income you have in any particular year,
b) what is your marginal rate of tax in the year you make the loss,
c) what levels do you expect your marginal rates of tax to be in the future.
d) is it worthwhile keeping a new loss making business separate from an existing profitable business, (so that you have the option of carrying the loss back 3 years if that is likely to be beneficial).
e) losses carried forward must be offset against the next available profits. That means you cannot choose not to do so just because you are paying tax at a lower rate in that future year, or have spare personal allowances which would reduce or eliminate tax payable without a loss relief claim – ie, losses can be wasted in these circumstances.
f) if a loss making business is incorporated, your accumulated losses can be carried forwards and offset against income you receive (personally) from the company
A simple illustration highlight why these options are important:
A £10,000 trading loss could be worth £4500 tax relief in one year and £0 in the next, or vice versa.
Where and when you offset is therefore worth some consideration.
You will also need to consider certain rules which may restrict your loss relief claim; for example:
a) Tax relief on an individual’s trading losses may be restricted if you are seeking to claim more than £50,000 in relief. The cap restricts the amount of the relief available to the higher of:
- £50,000, or
- 25% of adjusted net income.
b) If you use ‘cash accounting’ to produce your accounts you are not allowed to carry back your losses or use sideways relief.
c) There is no relief for losses if your business is not run on a ‘commercial basis’ (ie, with a realistic intention of making a profit)
There is a lot to consider and quantify so it is best to get professional advice.
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