Claiming tax relief on trading losses

These are difficult times at the moment for established businesses as well as for those just starting up so what if the worst happens and you make a loss?  Can you claim tax relief on those trading losses?

Well, the good news is that yes, you can claim tax relief on any trading losses.  However how you claim for these losses depends if you're trading as a sole trader or a partnership, or whether you've decided to trade using a limited company.​

trading losses

Claiming tax relief on trading losses if you trade through a limited company

Because the company is considered to be a separate legal entity, any trading losses made by the company can only be set off against any profits made by the company in prior years or any profits which the company may make in future years.

This may be a great disadvantage - especially in the early years of the business when the likelihood of losses is high.

In direct contrast the losses made by a partnership or sole trader in opening years may be offset against other income in prior years (subject to certain rules) - see below.

Let’s take an example:

You’ve been in a job for the past few years where you’ve been paying tax at 40%.

You decide to leave and set up your own business. In your first year of trading you make losses of £20k.

If you were trading as a sole trader, you could take those losses and set them off against your income in the prior year – entitling you to a tax refund of up to £8k (40%).

However, if you were trading as a limited company, you’d only be able to carry those losses forward to set off against future company profits.

Think this sounds far-fetched?  Well, we’ve seen many clients over the years in just that position – and all because ‘their friend’ told them they should trade as a limited company!

So if you’re just starting out in business, make sure you get the right advice for which trading vehicle is best for you – otherwise it could literally cost you thousands of pounds.

Claiming tax relief on trading losses if you trade as a sole trader or partnership

If you’re a sole trader or a partnership, there are several options which aren’t available to you if you trade through a limited company.

Generally speaking, the principle reliefs that are available to you are as follows:

1) Trading losses arising in the first four years of your business can be carried back and set against any income of the previous three tax years - earliest years first.

For example a 2016/17 loss can be carried back and relieved against any income for the tax years 2013/14, 2014/15 and then 2015/16.

2) If you’re an established business that’s been trading for a number of years, you can make a claim to set off your trading loss against any income for the tax year in which the loss arises and/or any income for the previous year (if the loss is large enough).

For example a 2016/17 loss can be relieved against any income for the tax years 2016/17 and 2015/16.

3) You can carry-forward the loss to reduce any profits for later tax years from the same trade.  This is the most straightforward way of obtaining relief though not necessarily the most tax beneficial.

For example a loss for the year 2016/17 can be relieved against your profits from the same trade for the tax years 2017/18 onwards.

4) If a loss arises when you cease to trade you can claim relief against your trade profits for the final tax year (things can get complicated where the loss straddles a tax year), then carried back against your trading profits of the previous three tax years, latest first.

For example a 2016/17 trading loss arising on the cessation of your business can be offset against your trading profits for the tax years 2015/16, 2014/15 and then 2013/14.

5) A trading loss can be offset against capital gains in either or both the tax year of loss or previous tax year, but only if there is any excess loss available after a claim in point 2 has been made.

For example any excess 2016/17 trading losses can be relieved against 2015/16 and/or 2016/17 capital gains.

6) If you decide to incorporate and you have unused trading losses arising from your business, these cannot be carried forward and relieved against the company’s profits.  However you may be able to relieve them against any future income you might draw from the company e.g. salary/dividends etc.

From a tax perspective the principle objectives are to obtain the maximum tax relief at the earliest opportunity.  You should also be aware that HM Revenue impose strict time limits on the above loss claims and are highly unlikely to agree a claim submitted outside the time limit.

By working closely with you, we will ensure that the most tax efficient solution is obtained and no important deadlines are missed.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].

Our eBooks cover this and many other topics.  Check them out here.


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