Chapter 16 Losses opening and closing year rules Flashcards
16.1 Opening year losses
In the opening years of trade, a special loss relief is available known as early trade loss relief. This applies to all losses sustained in the first four years of trading. The rules are in s72-74 ITA 2007.
16.2 Overlap Losses
Where a trader chooses a year end other than 5 April or 31 March, overlap profit arises under the current year basis. However, HMRC do not permit double counting of losses, when the basis periods overlap a loss must be recognized only in the earlier of the two periods.
16.3 The effect of an early trade loss relief claim
Early trade loss relief carries a loss back against net income of the three preceding tax years, taking the earlier years first. No loss is set against the net income of the loss-making tax year under a s.72 loss relief claim.
Trading losses are restricted when they are used for set off against other income. The maximum amount of trade losses that can be offset against income (other than trading income) is the higher of £50,000 and 25% of the individual’s total income.
16.4 Closing year losses
When a trader ceases trading, terminal loss relief is available under s89. This allows a loss to be deducted from trading profits in the tax year of cessation and to be carried back to the three preceding tax years, taking later years first. The losses are set against profits of the trade, it is not a net income claim, relief is only available against trading income.
16.5 Computing a terminal loss
When computing the terminal loss, the terminal loss period is usually the final 12 months of trading. This is not necessarily the same as the final accounting period, as cessation accounts are rarely exactly 12 months long. We calculate the terminal loss on a tax year basis.
16.6 Actual Trading loss of final tax year of trade
The actual trading loss allocated in the final year of trade will be the same as the terminal loss only where the final accounting period of trade is exactly 12 months long. Otherwise, the terminal loss and the actual trading loss of the final tax year will be different.
