5. Trading Income - loses

Question 1

What is Loss?

Answer 1

trading loss = when DE in an accounting period exceeds TR

Question 2

Consequences of a trading loss

Answer 2

1. In that year of assessment using that accounting period, tax assessment will be nil
2. Loss may be used to reduce tax assessments of that and other years of assessment so taxpayer will either: (1) pay less tax, or (2) reclaim tax they have previously paid

Question 3

Signposts + starting points

Answer 3

s.23-24

Question 4

s.64 - set off against general income

Answer 4

set off against taxpayer’s total income in PRECEDING or CURRENT year

• relief restricted to the greater of £50,000 or 25% of income

Question 5

What does ‘set off’ mean

Answer 5

you might have several sources of income (e.g. employment, trade, interest on a bank account, dividend in shares, rent from land)

trading loss can be set off against all of these even though they are completely different types of income

Question 6

Norton v Thompson [2004]

Answer 6

You have to make a claim for relief - you cannot just not pay tax thinking you can set it off later

• this taxpayer was issued a penalty because he didn’t pay tax
• he had to pay the penalty; because s.62 does not retrospectively reduce taxable income
• liability to pay tax on the due date was not expunged by a later claim for loss relief
• you are always liable, it doesn’t matter if you can retrospectively reduce tax liability

NB. It is possible that if you know you’ll make a loss next year, you can claim early enough which will reduce the need to pay over some tax (but he didn’t do this)

Question 7

s.83 - set off against future income

Answer 7

loss can be carried forward under s.83 and set off against first available profits of THE SAME TRADE

• so FUTURE PROFITS INDEFINITELY but must be same trade
• loss must be deducted as far as possible from earliest subsequent profits (Result = taxpayer may not be able to make use of his personal allowance)

S.84 – if your loss is higher than the profit for the earliest possible profit, you can keep setting off loss against the subsequent years with profit until unrelieved loss is fully deducted

Question 8

“Same trade”

Answer 8

s. 83 only applies if it is for the ‘same trade’ and the nature of the trade cannot change either
- no clear idea for what this means

Basically if you think you’re running a different business, you cannot carry forward

This is fine, because if you end your business, you get termination trading loss rules (allows you to go back three years against profits of the same trade only)

So disallowing s.83 if you end your business is fine because s.89-91 is generous enough already

Question 9

s.72-74 - early trading losses

Answer 9

if loss sustained in year of assessment in which business is first carried on, and the subsequent next 3 years = set off losses against GNERAL INCOME FOR PRECEDING 3 YEARS before the one in which loss occurred

so for first 4 years of trade you have this benefit

not available to companies (so if you envisage early losses, worth starting as a sole trader then latter incorporating into a business)

max amount that can be claimed is restricted to the greater of = £50,000 or 25% of income

nice rules = encourages you to set up business

Question 10

s.89-91 terminal losses

Answer 10

loss sustained in year of assessment in which trade is permanently discontinued (and in part preceding year of assessment beginning 12 months before date of discontinuance - s.90(1)) can be set off against business profits in year of cessation and 3 PRECEDING YEARS

s.64 can be chosen in priority to s.89 (e.g. if your business has been doing badly for 3 years so no profit to set off loss against)

Relief is given as far as possible against later rather than earlier years (s.91)

For example:
Say trading year ends June 2016 (discontinuance occurs December 2016)
- Loss in the final period of trading can be set again the income until June under s.89
- And against general income under s.64