18. TC - Unincorporated trader losses Flashcards
When does a trading loss arise?
When adjusted profit after capital allowances is -ve
How is a trading loss shown on the income tax comp
Shown as nil, never -ve
How can trading losses be used?
- S83 Carry forward loss to offset against first available future trading profits of the same trade
- s640 offset loss against total income in current TY and/or prev TY s261B (extension claim)
Offset against gains CY and/or PY
What procedure should be added when answering questions on unincorporated trader losses
- Determine the tax adj profits and losses after capital allowances for each acc period
- Determine when losses arise and therefore when loss relief is available (i.e. in which TY)
- Set up pro forma income tax comp for each year side by side and leave spaces for the loss set off to be inserted later
- Set up a loss memo working for each loss to show how it is utilised
- If there is more than one loss, consider them in chronological order
- Set off losses according to the requirements in the Q
When are losses carried forwards? (S83)
If no other claims are made, a trading loss is automatically offset against the first available future trading profits of the same trade
As much of the loss as possible MUST be offset, which may waste PA if the taxpayer has no other income
How long can you carry forward trading losses for?
Indefinitely
What is the deadline for when the taxpayer must agree the amount of loss with HMRC?
Within 4 years of the end of the tax year of the loss
What is the process when an individual opts to offset a trading loss against total income in the current TY and/or prev
Can be offset against current/prev in either order
As with carry forward relief, its all or nothing - taxpayer must reduce the total income as far as poss, which may waste the personal allowance
Taxpayer must then claim the relief within 12 months from 31 Jan following the end of the tax year in which the loss arose
What is the deadline for loss relief against total income?
Taxpayer must claim the relief within 12 months from 31 January following the end of the tax year in which the loss arose
What is the restriction on the offset of losses against other income? (i.e. non trade income)
There is a restriction for any trader who spends less than 10 hours per week on average running the business
In this case, the max loss is restricted to £25k (loss relief under s64 or s72)
Any remaining losses will still be carried forward
What is the restriction for all traders on the amount by which loss reliefs can reduce other income?
- The cap on income tax reliefs if the GREATER of £50,000
25% of the adjusted total income of the year in which the loss is being offset
What is adjusted total income?
Total income plus payroll giving donations less grossed up personal pension contributions
What else does the restriction for which loss reliefs can reduce other income apply to?
Also applies to qualifying interest payments e.g. on a loan to invest in a partnership
How can relief be given for trading losses against chargeable gains?
After the corresponding s64 claim has been made, a taxpayer may elect to offset any remaining trading loss against capital gains in the current tax year or prior tax year
The amount of trading loss that can be offset against capital gains is the lower of
1. Loss remaining after s64 claim (called the relevant amount)
2. Maximum amount =
Total capital gains for year X
Less total capital losses for year (X)
Less total capital losses bfwd (X)
Maximum amount X
How is the maximum amount calculated for relief for trading losses against chargeable gains
Total capital gains for year X
Less total capital losses for year (X)
Less total capital losses bfwd (X)
Maximum amount X
Note that the full capital loss b/f must be used in the calc for the maximum amount, even if the full amount is not actually being offset
What is the deadline for claiming relief for trading losses against chargeable gains?
Must claim the relief within 12 months from 31 Jan following the end of the TY in which the loss arose
What is National Insurance relief for trading losses?
Loss relief under s64 or s72 against non-trading income only applies for income tax purposes
When calculating Class 4 NICs, trading losses offset against non-trading income are always treated as if carried forward against the first available trading
However, when considering the small earnings limit for Class 2 NICs, trading losses can’t be brought forward to reduce earnings in a later year
What is there in addition to basic loss relief options for when a trader begins or ceasing trade?
Opening year loss relief
Terminal loss relief
How do you calculate a trading loss in the opening years?
The normal opening year basis of assessment rules apply to profits and losses
However there are no overlap losses: losses can only be relieved once
Where the same loss appears in 2 tax years, it will be treated as a trading loss for the earlier tax year only
What is opening year loss relief against total income
To help new businesses survive the initial years of trading, a special loss relief is available for losses that arise in the first 4 years of trade
Trader may elect to carry back such a loss to the 3 prev tax years on a FIFO basis against total income
Claim applies to all 3 years and may generate a refund of income tax
Relief is all or nothing: the taxpayer must reduce total income as far as poss which may waste OA
What is the deadline for claiming open year loss relief against total income?
12 months from 31 Jan following the end of the TY in which the loss arose
What is the deadline for claiming open year loss relief against total income?
12 months from 31 Jan following the end of the TY in which the loss arose
What is terminal loss relief/
Available for a loss made in final 12 months of trading (in addition to s64 relief)
Taxpayer may elect to carry back a terminal loss against the trading income of 3 preceding TY on a LIFO basis
Can you claim terminal loss relief as well as S64 relief?
Yes
How is terminal loss calculated?
6 April before cessation to date of cessation:
Actual trading loss of the last tax year (ignore if a profit) X
Add: overlap profits not yet relieved X
12 months before cessation to 5 April before cessationL
Actual trading loss (ignore if profit) X
Terminal loss x
What is the deadline for claiming terminal loss relief?
Must claim the relief within 4 years of the final tax year of trade
What loss relief is available for partners?
Partner has the same loss relief options as a sole trader for the use of their allocated loss
How are loss reliefs for partners determined
After applying basis period rules you need to decide whether they are
- Ongoing partner c/f (s83) , cy/py (s64)
- New partner c/f (s83) cy/py (s64), opening years relief (s72)
- Leaving partner cy/py (s64) terminal loss relief (s89)
What is the restriction on loss relief for partners in LLPs
Partners in LLPs may only claim s64 and s72 loss relief up to a max of their capital contributions into the partnership
Any remaining losses, in excess of their capital contributions ay be carried forward under s83
