Did you know tax reliefs may be available to you if you experience losses in a given year in your business as a self employed individual or a limited company owner? Furthermore, any losses you make can be offset against total profits of the current or previous year’s sales and can even be carried forward and set against future trading income, as long as it’s the same trade.

The rules for the self-employed are slightly different compared to the rules of a limited company.  For self-employed individuals there are three key factors to consider before deciding which option to choose, whether it’s to carry losses in the current, previous or forward to next year:
1) The timing of when we get the relief;
2) The rate of tax at which relief will be given;
3) The possible waste of other forms of tax relief.

For companies, only 2) above is relevant.

It is important to note that it is always better to gain some tax relief now rather than waiting for it, say for next year, and taking advantage of the the maximum possible amount of relief available to you.  By doing this, you will pay less corporation tax on current year’s profits and therefore achieve tax relief immediately.

It is also worth noting that partial claims cannot be made.

Tax Relief for the current year

Losses in the current year are taken away from the total profits for the year with the net total profits only liable for corporation tax.  Chargeable gains are not included in the loss figure, so this means if there were chargeable gains in the period under question, they would be protected by the loss.

Chargeable gains are when you experience an increase in value of any assets in your business between the time the asset is purchased and the time it is sold, which becomes subject to capital gains tax if sold.  Therefore any gains from the selling of an asset or chargeable gains will not be considered when calculating the loss number against the total profits for the period.

Tax Relief for the previous year

Once you have fully utilised the current year losses as noted above, any balancing loss can be carried back and set against the profits for the previous year, and must fall within the period of 12 months immediately preceding the start of the loss-making accounting period.

Remember, it is only possible to carry a loss back to the previous year once it has been set against total profits of the current year.  However, any loss remaining after set-off against current year profits does not have to be carried back – it can also be carried forward, as we see below.

Tax Relief for future year profits

As we saw with offsetting losses in the current year, any carry forward losses can only be offset against total profits and not any chargeable gains that may occur.  Also, any losses carried forward can only be utilised for the same trade and not for any other trade a business may undertake in the future.

What if i cease trading?

If you cease trading, terminal loss relief is available to you.  A terminal loss will happen only in the final period of trade, and for companies, you are allowed to use extended carry back of 36 months.  For companies, total profit is considered whereas for self-employed individuals, losses are offset against profits from the same trade only.

Mirandus Accountants can help

HMRC have a number of anti-avoidance provisions to prevent abuse of the loss relief rules, including restrictions where there is a change in the nature of the trade and where losses are uncommercial.