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.
Year of loss
Against total income from all sources (ITA 2007, s64, BIM 85015)
May be extended to include set off against capital gains once all taxable income has been extinguished (TCGA 1992, s261B, BIM85025)
Earlier years
Against total income from all sources in the preceding tax year
(ITA 2007, s64, BIM85015)
May be extended to include set off against capital gains once all taxable income has been extinguished (TCGA 1992, s261B, BIM85025)
Subsequent years
Against the first available profits of the same trade (ITA 2007, s83, BIM85060)
NB: When making a claim under ITA 2007, s64, the taxpayer may claim to set off the losses against either or both tax years.
Year of loss
Against total income from all sources (ITA 2007, s64, BIM85015)
May be extended to include set off against capital gains once all taxable income extinguished (TCGA 1992, s261B, BIM85025)
Earlier years
Against total income from all sources in the preceding tax year (ITA 2007, s64, BIM85015)
May be extended to include set off against capital gains once all taxable income has been extinguished (TCGA 1992, s261B, BIM85025)
Plus:
May be set off against total income in the preceding three tax years, prior to the tax year of loss on a first-in, first-out (FIFO) basis (ITA 2007, s72, BIM85025)
May NOT be extended to include capital gains
Subsequent years
Against the first available profits of the same trade (ITA 2007, s83, BIM85060)
Year of loss
Against all profits of the same trade assessable in the final tax year (ITA 2007, s89, BIM85025)
Earlier years
Unrelieved terminal losses against profits of the same trade assessable in the three preceding tax years on a last-in, last-out (LIFO) basis (ITA 2007, s89, BIM85025)
Subsequent years
N/A
Year of loss
Against income (including remuneration, rental income and dividends) from a company to which the business which made the losses is transferred (ITA, 2007, s86, BIM85060)
Earlier years
N/A
Subsequent years
Against income (including remuneration, rental income and dividends) from a company to which the business which made the losses is transferred (ITA 2007, s86, BIM85060)
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
