Chapter 12 - Income from self-employment: Trading Losses

Question 1

What are the reliefs for trading losses? 4

Answer 1

Income Tax Act 2007

1. Carry-forward trade loss relief - A trading losses may be carried forward to the future and set against future profits of the same trade. This is the relief which takes effect if no other tax relief is claimed in relation to the trading loss.
2. Trade loss relief against total income - A trading loss may be set against the traders total income for a period of up to two years.
3. Early trade losses relief - This is a special tax relief which concerns trading losses incurred in the early years of trading.
4. Terminal trade loss relief - This is a special tax relief which concerns trading losses incurred in the final year f trading.

Question 2

Notes about carry-forward loss relief: 4

Answer 2

1. Can only be given against future trading profits
2. Only future profits arising from same trade
3. Must be given against first available trading profits.
4. Given against the traders total income, but the amount cannot exceed trading income

Question 3

Limitations of trade loss carried forward relief: 3

Answer 3

1. Must wait until sufficient profits raise in the same trade
2. No control over the amount relived -p allowance waste
3. If tax rates are falling, relief may be given at the lower rate.

Question 4

Rules of trade loss relief against total income: 5

Answer 4

Allows trade loss to be set against traders total income for a period of up to 2 years.

1. Trader is under no obligation to make claim c/f if none made
2. Any unrelieved losses remaining after claim are carried forward.
3. Can only be done if business is carrying on for commercial purposes with view to realise profits
4. farmers and gardeners - not available if loss making for 5 years or more
5. Given against total income by deducting from non savings savings dividend in the way which results in the lowest tax liability.

Question 5

Trading loss incurred in a tax year may be set against the total income of: 3

Answer 5

Either 1. the tax year in which the loss is incurred
or 2. the previous tax year
or 3. both of these years (if the loss is large enough)

Claim must be made by jan 31st in the second tax year following the loss making year - must also claim capital gains relief by this time
can be set against previous year regardless as to whether trade is being carried on

Question 6

What does early trade losses relief entail? 6

Answer 6

Trading losses incurred in any of the first four tax years can be set against the traders total income of the three previous tax years aka sideways relief
1. Should be relieved against the earliest year first
2. Applies to all 3 years concerned, cannot pick
3. Deducted trading loss from total income in a way which lowers tax liability the most
4 Loss incurred in overlap is treated as of previous year
5. Trade must be carried on on commercial basis
6. Early trade loss claim must be made 31 jan second tax year

Question 7

Limit of sideways relief for non-active traders

Answer 7

A non active trader is someone who is not personally engaged with a trade for at least 10 hours a week. £25,000 limit applies to following reliefs:

1. trade loss relief against total income
2. early trade losses relief
3. relief for trade losses against capital gains

Question 8

Calculating terminal loss relief: 3

Answer 8

1. the actual trading loss incorrect from 6 April to the date of cessation
2. the actual trading loss incurred from a date 12 months before the date of cessation following 5th April
3. any over lap relief available.

Question 9

Rules relieving terminal loss

Answer 9

Can be relived in the year of cessation and 3 previous years

1. must start with most recent years
2. must give maximum possible relief each year
3. given against traders total income but cannot exceed trading income