Insights

Although the government’s proposed relaxation to the ways in which companies can utilise trading losses is still be on hold for the time being, trading losses incurred by businesses; whether limited companies, partnerships or sole traders, still offer a valuable number of alternatives for claiming relief.

This article considers the alternatives currently available for different types of trading structures.

5 loss relief options available to limited companies

1. Offset losses in the current year

Losses of an accounting year can first be offset against other profits of the same year. These can include interest received and capital gains and the loss must be offset in full before considering any other types of offset.

2. Surrender to group companies

Excess losses can be surrendered to group companies which have profits in the same year, in order to reduce or eliminate their corporation tax liabilities. The relaxations anticipated in the finance bill include the ability to also use carried forward losses in this way, but currently group relief is restricted to same year losses only.

3. Carry losses back to the previous accounting year

Alternatively, if after offsetting a loss against profits of the current financial year, there are still some losses remaining, these can be carried back and offset against total profits made by the loss-making company in the previous 12 months. Note this is only an option if the current year’s claim has already been made.

4. Carry forward

Unused losses are automatically carried forward to offset against trading profits of the loss-making company in future years, until they are extinguished. Note that carried forward losses can only be offset against trading profits from the same trade, not against other types of income.

5. Terminal loss relief

If a company ceases to trade, it can claim a trading loss incurred in the final 12 months be carried back and offset against total profits (not just trading profits) of the last 3 years. Carried back losses are claimed against later years’ profits before earlier years’, until they are extinguished.

6 options for losses incurred by sole traders or partners

1. Current year claim

A trading loss can be offset against net income (defined as total income less deductible payments before personal allowances), within the loss-making year. There is however a restriction to the amount which can be offset in this way, taking into account other offsets such as loan interest relief. This restriction is £50,000 or 25% of total income, whichever is higher.

2. Carry back

Just like a company, a sole trader is able to carry back trading losses to be offset against total net income of the previous year, but without the restriction of having to claim losses for the current financial year before making the carry back claim. This gives sole traders more flexibility over the financial year they choose to offset their losses, however the overall restriction of £50,000 or 25% of total income still applies to the amount which can be offset.

3. Carry forward

Unused trading losses can alternatively be carried forward to offset against trading profits of the same trade in future years, until extinguished.

4. Terminal loss relief

A trading loss incurred in the final 12 months of trading can be carried back and offset against trading profits from the same trade in the previous 3 years. It must be offset against later years’ profits before earlier years’ profits.

5. Losses incurred in the early years of trade

Losses incurred in the first 4 years of trade can be carried back and offset against total net income of the previous 3 years; earliest years first.

Conclusion: Do the maths to understand how to utilise losses

Because there are various options available when claiming loss relief, both for companies and for individuals, deciding how to proceed is not always clear-cut. Aspects to be taken into account will include tax rates paid in the past and likely to be payable in the future, likely profit levels in future years, and the impact an immediate tax repayment will have in providing working capital.

As with all tax planning strategies, it’s important to seek specialist advice and understand the financial impact of any course of action before making any decisions. If you would like to discuss any business accounting or tax issues in more detail please email partners@rjp.co.uk.