Module 7 Trading Losses

Question 1

How is a trading loss shown in an income tax computation for a sole trader?

Answer 1

Always as Nil.

For example a trading loss of £4350 will show as £0 on the income tax computation.

Question 2

What is a loss memo?

Answer 2

A business will usually keep a note of the tax adjusted losses available for tax relief. This is known as a loss memo.

Question 3

What are the three options available for an unincorporated business that has a trading loss for a tax year?

Answer 3

1) Carry back to previous tax year

2) Use loss in current year

3) Cary forward

Question 4

If a trading loss for a tax year is carried forward (C/fwd) it will:

Answer 4

• be automatic and no claim is needed
• continue to be carried forward indefinitely
• 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)

Question 5

When carrying a loss forward, if the loss is larger than the trading profits for that trade what happens?

Answer 5

The trading profits for that year will be reduced to £nil and the remaining loss will carry forward against the trading profit of subsequent years until the loss has been offset in full.

Question 6

When making a claim for carrying a loss forward what are the rules?

Answer 6

• Loss relief is automatic however tax payer must make a claim to establish the amount of the loss which is available to be carried forward
• Claim to establish loss must be made no later than 4 years from the end of the tax year in which the loss arose

Question 7

When making a claim for a loss in a current tax year what are the rules?

Answer 7

• use the loss in full (cannot be partial)
• If loss is larger than the total income, then it is possible to make a further claim. If not its carried forward

-A claim must be made by the first anniversary of 31 January after the end of the tax year of loss. (i.e. If loss is in 23/24 claim must be made by 31 Jan 2026)

Question 8

When making a claim for a loss in a previous tax year what are the rules?

Answer 8

• The trading loss must be offset in full against total income of previous tax year (no partial claim)
• If loss is larger than the total income then it is possible to make a further claim with remaining loss. If no claim made it is carried forward
• A claim must be made by the first anniversary of 31 January after the end of the tax year of loss (the same time limit for the current year claim). (i.e. If loss is in 23/24 claim must be made by 31 Jan 2026)

Question 9

What is the restriction on the total value of trading losses which can be offset against non trading income?

Answer 9

This is the greater of:

£50,000 or 25% of the total income for that tax year

There is no restriction on the amount of the loss which can be offset against income from the same trade.

Question 10

What is the maximum loss that may be relieved against capital gains?

Answer 10

Is the LOWER OF:

• The trading loss remaining after the total income claim for the tax year in question

AND

• The capital gains for the tax year net of both current tax year capital losses and all brought forward capital losses