PLC - Use of Income Tax Losses (NOT CT)

Question 1

What is the ordinary ‘basis period’ over which an individual must compute their profits or losses?

Answer 1

12 months

Question 2

What is the basis period for an individual in the first year of trading for the purposes of computing their profits or losses?

Answer 2

The period begins with the date on which the person commences trading and ends on 5 April in that tax year.

Question 3

In the second year of trading, what is the basis period for computing profits and losses for an individual?

Answer 3

12 months unless the accounting date falls less than 12 months from the commencement of trading in which case the basis period is the first 12 months of trading.

Question 4

What general income can losses incurred by an individual in a given tax year be used against?

Answer 4

Net income before personal allowances for either that tax year, the previous year or both years.

Question 5

If an individual taxpayer wants to use losses for both the current year and the previous year, can they determine the priority of claims in such circumstances?

Answer 5

Yes

Question 6

If an individual uses income tax losses in both the current and previous year, can they claim only part of the losses in a particular year?

Answer 6

No, the losses have to be used to the fullest extent in that year - it is not possible to claim only part of the losses in a particular tax year to preserve the personal allowances.

Question 7

What is the deadline for an individual to claim the benefit of current or prior year losses?

Answer 7

No later than the first anniversary of the self-assessment filing deadline for the tax year in which the loss arises.

Question 8

What was the issue in the Cotter litigation?

Answer 8

Whether a claim for loss relief should have been made in the individual’s tax return or separately - which would give rise to a cashflow disadvantage because a separate claim need not be given effect to until an enquiry is closed.

Question 9

Can an individual’s surplus trade losses constitute allowable losses for capital gains tax?

Answer 9

Generally yes but not so as to create a capital loss, and if the losses are equal to the chargeable gains, the annual exempt amount is lost.

Question 10

What is ‘early trade loss relief’?

Answer 10

Where an individual accrues a loss in any of the first four years of trading, they may make a claim for the loss to be deducted from net income for the three tax years preceding that in which the loss arises instead.

Question 11

How is early trade loss relief prioritised when applied to the first three years of trading?

Answer 11

It is applied to the earliest year to the fullest extent possible, then the next year and then the year following that.

Question 12

In order to obtain the ‘sideways’ effect of early loss relief, what characteristic is required of the trade giving rise to the loss?

Answer 12

It must be commercial - carried on throughout the period on a commercial basis and with a view to realising profits (even if profits are not actually realised), and where trading profits were reasonably expected in the period of loss or were expected within a reasonable period afterwards.

Question 13

How did the FTT in Murtagh v HMRC [2013] UKFTT 352 define (obiter) the requirement that there must be an expectation that profits would arise a reasonable period after the year the losses arose (in order to obtain early trade loss relief)?

Answer 13

By reference to commercial reality. Accordingly in appropriate cases the period could be quite lengthy.

Question 14

Is sideways loss relief available if the cash basis is used to calculate the losses?

Answer 14

No (see section 74E ITA 2007)

Question 15

Is sideways loss relief available if a person makes a loss in a trade, profession or vocation and the loss arises directly or indirectly in consequence of, or otherwise in connection with arrangements that have a main purpose of reducing liabilities to IT or CGT via sideways relief?

Answer 15

As of 21 October 2009, no; see section 74ZA ITA 2007.

Question 16

Is sideways loss relief available if the loss derives from capital allowances arising on the provision of plant or machinery for leasing or of an asset from which royalties or licence fees accrue?

Answer 16

No, unless the individual carries on the trade continuously for six months, beginning or ending in the loss-making period, and devotes substantially the whole of his time to the trade in that six months or the loss making period (see section 75 ITA 2007).

Question 17

Is sideways loss relief available if the loss arises from a first year allowance or an annual investment allowance?

Answer 17

In certain circumtances, no.

Question 18

Is sideways loss relief available if the loss arises from a trade of dealing in commodity futures that the individual carries on in a partnership in which one or more of the members is a company and arrangements have been made of which the sole benefit that may be expected to arise is sideways relief?

Answer 18

No - see section 81 ITA 2007.

Question 19

Is sideways loss relief available if the trade giving rise to the loss comprises or includes exploiting films?

Answer 19

No - see section 82 ITA 2007.

Question 20

To the extent that trade losses accrue for which relief has not been obtained in the present or past tax years, what can be done with the trade loss?

Answer 20

It can be carried forward and deducted from net trading income for the following and subsequent tax years (see sections 83 and 84 ITA 2007).

Question 21

When is terminal trade loss relief available?

Answer 21

An individual who permanently ceases trading in a tax year and makes a loss in that tax year and/ or in so much of the previous tax year as falls not more than 12 months before the cessation is entitled to claim terminal loss relief against trading income.

Question 22

How does terminal loss relief work?

Answer 22

The losses can be deducted from trading profits for the final tax year, and then carried further back (ultimately a further three tax years if necessary).

Question 23

What special treatment is available in respect of dvidends and interest pursuant to terminal trade loss relief?

Answer 23

Any dividends or interest related to the trade but which are taxed under other provisions of the income tax legislation may be classified as trading income if there is otherwise insufficient trading income for the tax year against which to offset the terminal losses.

Question 24

What is post-cessation relief?

Answer 24

A person may be entitled to relief for payments that are made, or other expenses that are deemed to arise, after trading has permanently ceased.

Question 25

Within what period must a qualifying cost be incurred in order to qualify for post-cessation trade relief?

Answer 25

Within seven years of the cessation.

Question 26

Is post-cessation relief available in respect of remedying defective work, goods or services which were provided in the course of the taxpayer’s trade?

Answer 26

Yes

Question 27

Is post-cessation relief available for damages for defective work, goods or services provided in the course of the taxpayer’s trade?

Answer 27

Yes

Question 28

Is post-cessation relief available for costs of collecting a debt that was brought into account in calculating the profits of the discontinued trade?

Answer 28

Yes

Question 29

Are debts released within seven years of cessation of trade within the scope of post-cessation relief if the debt is released as part of a statutory insolvency arrangement or if it proves to be bad?

Answer 29

Yes

Question 30

Is there a TAAR in relation to post-cessation relief?

Answer 30

Yes, but only for payments made and events occurring on or after 12 January 2012.

Question 31

If an individual is unable to make deductions for all their post post-cessation trade losses because they have insufficient total income, how can the expenditure be relieved instead?

Answer 31

They may be able to treat the unused part as an allowable loss for capital gains purposes.

Question 32

Are there restrictions on sideways loss relief and terminal trade loss relief in respect of a trade carried on wholly outside the UK?

Answer 32

Yes - see section 95 ITA 2007.

Question 33

Can an individual taxpayer who carries on a trade wholly outside the UK claim relief for trading losses against capital gains?

Answer 33

No

Question 34

What is the general rule as regards an individual’s losses from a property business?

Answer 34

Losses from a UK or overseas property business are usually carried forward although they can be set off against net income in limited circumstances.

Question 35

Aside from agriculture and husbandry, what sort of losses can be claimed by an individual in respect of a UK or overseas property business to be set against the taxpayer’s net income?

Answer 35

Losses, subject to further conditions and limitations, that have a capital allowances connection.

Question 36

is post-cessation relief available in respect of UK property businesses?

Answer 36

Yes.

Question 37

Are losses that accrue from employment deductible from net income?

Answer 37

In principle, yes.

Question 38

Losses on a disposal of what kind of shares can, subject to other requirements, give rise to an allowable income tax loss?

Answer 38

A disposal of ‘qualifying shares’, being shares that either attract relief under the EIS or are shares in a ‘qualifying trading company’ under section 134 ITA 2007.

Question 39

Is tax relief potentially available against certain income if a loss arises from post-cessation trading receipts?

Answer 39

Yes

Question 40

Is tax relief potentially available against certain income if a loss arises from post-cessation UK property receipts?

Answer 40

Yes

Question 41

Is tax relief potentially available against certain income if a loss arises from interest income?

Answer 41

Yes