Chapter 15 – Losses continuous trades Flashcards
15.1 Introduction
When a sole trader makes a loss, the trading income assessment for the year will be nil. The trader can then make loss relief claims. The rules allow us to set losses against other income under s64 ITA 2007. We are also allowed to carry forward losses
15.2 Current Year Loss relief under section 64
Losses may be set against net income. This is total income less any deductible payments, but before personal allowances. The loss can be set against the net income of the tax year of loss and/or the preceding tax year. Loss relief is only available if the business is being run on a commercial basis with a view to realizing a profit.
The two claims (current year and previous year) are independent and we can make either or both claims in any order we like. A s64 claim is not mandatory. No partial claims are permitted, a taxpayer must utilize all of the loss available for relief or relieve all of the available income.
15.3 Loss Planning
It is important to plan the effective use of a loan, when deciding how best to relieve a loss, the following factors must be considered:
• Marginal tax rates at which the loss will be relieved. We want to offset a loss against income which is taxed at the highest rate of income tax
• Loss of personal allowance. A s64 claim can waste a personal allowance. If income is going to be set against the personal allowance, there is no point making this claim.
• Timing – we would like to relieve a loss earlier rather than later.
15.4 Extension to capital gains
Where a person claiming relief for a trade loss against net income is unable to make full use of the loss, they may be able to offset this against capital gains. Losses under s.71 are used after current year capital losses but before any capital losses brought forward from previous years. We have to make the s64 claim before we can extend to gains. The s71 ITA 2007 relief will be the lower of:
• The remaining loss after the s64 claim, and
• The relevant maximum which is the net gains in the tax year less capital losses brought forward
15.5 Carry Forward of Losses under Section 83
Losses can be carried forward under s83 ITA 2007. Losses may be carried forward and set against future profits of the same trade. A claim to carry forward trade losses will be made when a loss is not relieved against other net income or against capital gains.
Once a section 83 claim has been made, the carried forward loss must be set off against the next available trading income.
15.6 Loss relief claims
Loss relief claims under s64 ITA 2007 must be submitted to HMRC by the first anniversary of 31 January following the end of the tax year of the loss. There is no time limit for s71 claim but as the effect of the s71 is to extend the s64 the same time limit should be adhered to.
15.7 effect of tax payments
A loss utilized in the current year under s64 simply reduces the net income of that year, thereby reducing the amount of tax which is due. A loss that is carried back to a previous year under s64 revises that earlier year’s tax liability and creates a tax refund.
15.8 Restriction on loss relief
The total amount for all relevant reliefs that can be deducted in arriving at net income for a tax year is limited to the greater of:
• £50,000, or
• 25% of the individuals adjusted net income for the tax year
The adjusted total income is generally their total income less the gross amount of any personal pension contributions paid. The restriction applies to loss relief claims under s64 in determining the amount of loss relived against non-trading income, there is no restriction on losses against trade income.
15.9 Other restrictions
No loss relief is available unless the trade is commercial. The trade is commercial if it is carried on throughout the basis period for the tax year:
• On a commercial basis, and
• With a view to the realization of profits
This means that losses arising as a result of a hobby trades will not be available for relief against other income under s64.
