M7: Trading Losses Flashcards
How do we calculate a tax-adjusted trading loss for a business?
(including Proforma)
A tax-adjusted trading loss is calculated in the same way as a tax-adjusted trading profit.
The accounting profit or loss is adjusted for capital items, (Items where the tax law requires an adjustment
and items which are dealt with elsewhere in the income tax computation.)
Proforma:
Net profit or loss per accounts (PBT for a Ltd Co.) X / (X)
Add:
Appropriation of profit (drawings) X
Capital expenditure X
Expenditure not wholly and exclusively for business X
Expenditure disallowed by law X
Expenditure relieved elsewhere X
Income taxable as trading income but not in accounts X
= Total
Deduct:
Capital receipts X
Income taxable elsewhere in computation X
Deductible expenditure not in accounts X
Capital allowances X
= Total
Tax-adjusted trading loss (X)
How is a trading loss shown in an income tax calculation?
It is shown as £nil trading income in the sole trader’s
income tax computation.
It is never shown as a negative number.
What is a loss memo?
The loss memo records the amount of tax-adjusted trading losses (also known simply as ‘trading losses’) that a business has available for use and how the losses are used to obtain tax relief.
How does carrying the trading loss forward work?
If a trading loss for a tax year is carried forward (C/fwd) it will:
* be automatic and no claim is needed
* continue to be carried forward indefinitely until fully utilised
* be used against the first available trading profits from the same trade in future tax years
i.e. there is no partial use in a future period or skipping a year.
How can we use the trading loss in the current year?
If a claim is made, a trading loss must be relieved against total income (that is before deductions from total income and the personal allowance) in the same tax year as the loss arises.
The loss must be offset in full.
DEADLINE: by the first anniversary of 31 January after the end of the tax year in which the loss arose.
Whats the trading loss proforma?
Trading income X X X
C/fwd loss - - (X)
Other income X X X
= Total income X X X
CY claim - (X) -
PY claim (X) - -
Deductions from total income (X) (X) (X)
=Net income X X X
Personal allowance (X) (X) (X)
= Taxable income X X X
What are the 3 different ways to use a trading loss?
- Carry back to previous tax year
- Use trading loss in current tax year
- Carry forward to future tax years
How can trading losses be used against capital gains?
(& what’s the proforma?)
Trading losses can be used for capital gains ONLY if its the remaining loss amount after total income of the CY or PY is already made.
Proforma:
Capital gains for the tax year X
- Capital losses for the tax year (X)
= Net capital gain for the tax year X
- Rem. Trading loss claim against capital gains (X)
= Total
- Annual exempt amount (X)
- Capital losses brought forward (X)
= Taxable gain X
DEADLINE: by the first anniversary of 31 January after the end of the tax year in which the loss arose.
How do capital allowances affect a trading loss claim?
(& what do some business choose to do as a result of capital allowances?)
Capital allowances reduce the size of the trading loss. This is because capital allowances are deducting when calculation the tax-adjusted trading profit/loss.
Businesses may choose to claim fewer capital allowances/disclaim CA. This means more capital allowances can be claimed in the future as the TWDV is carried forward to the next tax year.
BUT, AIA is only available in 1st year of purchase and SBA will be lost so there needs to be planning.
How does carrying a trading loss back to the previous year work?
It is possible to use a trading loss against total income of the previous tax year. The loss must be relieved in full.
DEADLINE: by the first anniversary of 31 January after the end of the tax year in which the loss arose.
What are the different considerations that must be weighed up before using a trading loss?
- Timing of tax relief: Do you want a refund of tax paid in the current year or prior year, or a
reduction in tax liability in future years?
− A refund of any income tax already paid is generally more attractive to taxpayers. - Wasting deductions from total income and/or the personal allowance: Will a claim waste
some or all of the deductions from total income or personal allowance for the tax year? - Tax rate: You should generally aim to save tax at the highest tax rate possible, for example a
taxpayer may be paying tax at the basic rate one year and higher rate the next. - Future trading profits: Carrying a loss forward is only beneficial where there are trading
profits in future years.
What is the loss restriction rule when it comes to non-trading income?
(Trading income doesn’t have a loss restriction)
There is a restriction on the total value of trading losses that can be offset against non-trading income in a tax year.
Rule = the greater of £50,000 or 25% of the total income for that tax year.
If the full loss cannot be utilised in a given tax year due to this restriction, it can be used, subject to the same restriction, in another tax year.
What are all the different options a business can take when it comes to using a trading loss claim?
- Do nothing and allow the loss to carry forward.
- Make a current year claim only and allow any remaining loss to carry forward.
- Make a prior year claim only and allow any remaining loss to carry forward.
- Make a current year claim followed by a prior year claim, leaving any remaining loss to carry forward.
- Make a prior year claim followed by a current year claim, leaving any remaining loss to carry forward.
Can you use a carried forward loss on any type of income for that year?
No. Carried forward losses are only available to be used against trading income of that year.
Thus, proforma is always laid out Trading income, C/fwd loss and then other income as the C/fwd can only be used on TI.
