It’s an unpopular topic, but it’s one where good advice and a clear understanding of the legislation can be crucial to your business’ survival: sometimes, over the course of a year, a business may make a loss rather than a profit.
In your first year, it’s not uncommon to make a loss overall; and at any point even a successful business can record a loss with a heavy enough investment in growth. Assuming you have the funds to cover your losses, it may not be a problem – and there is one small benefit.
HMRC only taxes profits, not losses. If you find yourself looking at a trading loss toward the end of a year, you have various options ahead.
The Tax Implications of Trading Losses
As always, while it should go without saying we want to make sure it’s clear – your specific situation will affect your taxes, and what we go into below should be taken only as guidelines until you’ve checked. If you’d like to discuss your specifics, drop us a line.
In general, trade losses can be offset against three different categories:
- Profit from the same trade
- Income received from a company you transferred your trade to in exchange for shares in the company
- Income or (sometimes) capital gains of the same or an earlier year.
However, not all losses can be claimed against all of these options. For example, if you use cash basis, you can’t claim against prior income or capital gains; if your trade is run as a hobby or is otherwise not run commercially and for profit, you also can’t claim against prior income. Sometimes there is also a maximum amount of loss you can claim.
You may only claim a given loss once, and partial claims are not allowed. This means that if you’re looking to offset the loss against your income or capital gains from previous years, you have to use as much as possible within the year you’re in. If there’s any remaining balance, you may be able to use it against chargeable gains.
It’s also important to remember that the total amount of income tax relief that you can claim for deduction in a single tax year is capped. This may affect your loss relief. The limit will be £50,000 or 25% of your adjusted total income for the year, whichever is higher.
These restrictions don’t apply when you offset your loss against profits of the same trade.
In other words, you can carry forward and unused loss to use against profits of the trade in later years, and you can also use it to offset income from a company you transferred your trade to, if you received shares in that company as part of the exchange. In the latter case, when you fill out your tax return you will want to complete the Additional Information section on Post-Cessation Trade Relief.
If your trade losses are part of an investment or growth phase, or if your market was negatively affected for a period of time but can be expected to return to normal (as happened to many businesses over covid), a trading year without profit can be survivable. This tax relief program is designed to help ensure that’s the case. If you have any questions on how these regulations affect you, or how best to claim on them, get in touch with us directly and we’ll be happy to help.
