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Tax relief for trading loss

If your business spends more than it receives during an accounting period it is classed as making a trading loss. You can off set trading losses against profit or capital gains in various ways as detailed below

Early Trade Losses Relief

If you make a trading loss within any of the first 4 tax years of trading, you can carry it back and set it against your income from any source (but not capital gains) in the previous 3 tax years. You can't pick and choose which years to set the loss against. You must start with the earliest year.

For example, you start a business in January 2011 (in the 11/12 tax year). If you make a loss in the 14/15-tax year, you can set this loss off against your income in the tax years in the following order:

  • Year 11/12
  • Year 12/13
  • Year 13/14

You must claim this relief within one year of the 31 January following the tax year of the loss. For a loss in 15/16, you must claim by 31 January 2018.

Carry-across and carry-back relief

HM Revenue & Customs also calls this relief 'Trade Loss Relief against general income'. You can carry the loss across and set it against your other income and capital gains in the year of the loss. This would reduce the income tax you would otherwise have to pay on other income and/or the capital gains tax you'd otherwise have to pay on the capital gains.

This can be done in reverse so you can also carry the loss backwards. This means the loss can be deducted from your total income and capital gains of the preceding tax year. This could give you a tax refund for the previous tax year. You need to set the loss against total income first and then set any excess loss against capital gains.

This relief must be claimed within one year of the 31 January following the tax year of the loss. For a loss in 15/16, you must claim by 31 January 2018.

Carry-forward relief

If you suffer a trading loss, you can carry the loss forward. This means deducting the loss from profits that the business produces in future accounting periods. 

This carry-forward relief is not the most popular choice, as you have to wait for future profits of the business before you can benefit from loss relief. This relief can be much more restrictive in that it only provides for the loss to be set against profits that the business produces. Capital gains and other sources of income cannot be claimed against.

You must claim this relief by declaring your intention to use this loss relief within 4 years of the end of the tax year of the loss.

Carry-back of terminal trading loss

You can also carry a loss back if you suffer a trading loss in the final 12 months in which you do business. In this instance the loss will be deducted from your trading profit in the 3 tax years before the last year you were trading, taking the later years before the earlier years. You may then reclaim tax from the Inland Revenue that you've already paid. Remember, the loss cannot be set against income from other sources or capital gains only your trade.

You must claim this relief within 4 years of the end of the tax year of the loss.

Below the table provides a summary of the trading loss relief that a sole trader is entitled to claim. 

Trading loss relief for Sole Traders

Type of relief

Time when loss occurred

Income/profits against which loss will be set

Relevant tax year

Early Trade Losses relief

Within first 4 tax years of trading

Any income

3 tax years preceding loss, starting with earliest

Carry-across/back relief

Any accounting year of trading

Any income and chargeable gains

The tax year of the loss and the previous tax year

Carry-forward relief

Any accounting year of trading

Subsequent profits of the same trade

Any subsequent years until loss is absorbed

Terminal Carry-back relief

Final 12 months of trading

Profits of the same trade

The 3 tax years before the business ceased trading, starting with the latest

 

Conclusion

Sole traders and companies may incur trading losses so a good understanding of how relief can be obtained for these is important to maximise both the tax and commercial benefits. It is also important to be aware of the differences in the reliefs for a company compared with a sole trader