Unincorporated trader losses

Question 1

When does a trading loss arise

Answer 1

A trading loss arises when a trader’s taxable trading income in a period of account produces a negative result. Trading income is recorded as £nil and the loss is dealt with separately

Question 2

Carry forward of trading losses

Answer 2

If a trader does not claim any specific form of loss relief, trading losses are automatically carried forward under s.83 and set off against the first available future trading profits of the same trade.

S.83 relief is automatic if no other claims are made. However, a claim must be made to establish the amount of the loss to be carried forward within four years of the end of the tax year in which the loss arose.

NB CANNOT RESTRICT TO UTILISE PERSONAL ALLOWANCE

Question 3

Setting trading losses against general income

Answer 3

s.64

A trading loss arising in a tax year may be set against the trader’s general income for:

• The same tax year and/or
• The previous tax year
  In any order, but note these are “all or nothing” claims

The business should be carrying on with a view to making a profit in order to claim s.64 relief. Otherwise s.83 relief is available.

If the s. 64 claim does not cover all of the income of a tax year, for the purpose of Tax Compliance, the loss should be set against income in the following order

• non savings income
• savings income
• dividend income

Question 4

Loss relief and national insurance contributions

Answer 4

Loss relief under s.64 or s.72 against non trading income only applies for income tax purposes. Such losses are treated as if carried forward for class 4 national insurance purposes to be set off against trading income in future years. For the purpose of the small earnings exception limit for class 2 national insurance, trade losses cannot be brought forward to reduce earnings in another year.

A s.64 claim must be made within 12 months from 31 January following the end of the tax year in which the loss arose.

Following a s.64 claim for trading losses against general income, a claim may also be made under s.261B TCGA 1992 for any unrelieved part of the trading loss to be set against the trader’s capital gains for that tax year.

Question 5

Choosing which loss relief to use

Answer 5

consider the following

• the rate of income tax applying in the relevant tax years
• the possible wasting of the personal allowance
• the timing of the loss relief (ie for cashflow purposes earliest is best)

Question 6

Loss relief in opening years

Answer 6

(s.72)

In ADDITION to the other options, there is a special opening year loss relief available for trading losses incurred in any of the FIRST FOUR tax years under s.72.

Trading losses can be set off against the general income of the three tax years preceding the tax year of the loss on a first in first out basis.

A s.72 claim must be made within 12 months from 31 January following the end of the tax year in which the loss arose.

Again it is an all or nothing claim.

Question 7

Loss relief on cessation

Answer 7

How terminal loss relief works (s.89)
In addition to relief under s.64, relief is available under s.89 for a loss on the cessation of a trade to be carried back and relieved in earlier years. The loss available for relief under s.89 is the loss of the LAST TWELVE MONTHS of trading.

Remember that overlap profit relief may be available in the last tax year and should be included as part of the trading loss for that year. ie overlap profits increase the loss.

Relief is given against TRADING INCOME in the last tax year the the previous three tax years on a last in first out basis.

Question 8

Summary of loss relief options

Answer 8

S.83 - carry forward - set against future trading profits from the same trade - time limits - indefinite - conditions - automatic - claim - agree amount of loss within 4 years of end of the tax year of loss

s 64 - current year and or prior year (any order) - set against total income and then can be extended against net gains - time limit is current year and or prior year - conditions all or nothing - claim 12 m from 31 Jan following tax year of loss

s. 72 Loss in the first 4 tax years - set against total income - 3 year carry back (FIFO) - all or nothing - claim 12 months from 31 Jan following tax year of loss
s. 89 terminal loss relief on cessation, set against trading profits, 3 year carry back (LIFO), all or nothing, claim 4 years from the end of tax year of cessation.

Question 9

Restrictions on the use of losses

Answer 9

Non active traders - if they do not devote at least 10 hours a week to the trade, “sideways” loss relief is restricted to £25,000. Any remaining loss is then carried forward against future profits from the same trade.

Restriction on income tax reliefs against total income - there is a limit on the amount of certain deductions against total income. The limit is the higher of £50,000 and 25% of total income for the year. This limit applies to trading loses against total income under 2.64 and s.72