Trade Losses 16/17
In this blog post we are going to deal with trade losses. Firstly we will discuss the rules on trade losses for individuals and partners and then we'll go on to the tax treatment of losses for limited companies.
If you are a sole trader or partner and your expenses are more than your income you can use these losses to your tax advantage in several ways. Firstly you can offset them against your total income in your current year and the previous year. If you still have losses left to use after this you can use it to reduce your chargeable gains (reducing your capital gains tax liability). If you are in your first FOUR years of trading you can claim 'early trade losses relief' and claim back for the three prior years (to 1314 at time of writing). These claims would usually be made using your self-assessment tax return. There are certain limitations on this, chiefly you cannot claim back or claim sideways relief (against other income than the trade you are claiming the loss on) if you are using the cash basis method of accounting, if you are not trading commercially (its a hobby), or you spend less than 10 hours a week working in this area. Any loss unclaimed in the above way can be carried forward against profits of the same trade in future years. If you have ceased trading you can claim terminal loss relief and claim back the tax paid in the three prior years as if you had made this loss then, starting with the latest year. Loss claims are limited to £50,000 per tax year or 25% of income whichever is greater.
For limited companies it is slightly different. Firstly any loss not claimed in any other way will be carried forward automatically, this is done in the company tax return. Or you can carry the loss back and claim against prior year profits. It must be against the same trade. Here, though it is the prior 12 month period, so if your accounting period isn't aligned an apportionment will be necessary. If the company has ceased trading, the loss can be carried back three years. Capital losses on sale of assets cannot be set off against trading profit. As discussed in the previous post the rules on property losses are slightly different: they must be used against other income in the same period, they cannot be carried back and if any losses remain unused they can be carried forward providing the property business continues.
The topic of next week's blog is over to you the reader. If there is any accountancy issue you would like us to clarify please get in touch and we will explain it in the next post.