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Relief for losses

The following is intended as a guide only.  Reliance can only be placed on information directly received from HMRC.  SimpleTax is not authorised to give tax advice.

Trading losses can be set against current or prior year income.  Use though maybe subject to restrictions below

The Revenue will not allow set off against non-commercial activities. Tax avoidance using capital allowances, receipts after cessation, and leasing are not allowable

Trading losses can be set against capital gains.

New trade early years

  • Losses made during the first 4 years trading can be carried back and used against income of the 3 prior years.
  • Consider separate accounts for a new lossing making business.  Allows carry back of losses.
  • Use of Cash accounting stops loss carry back or sideways relief.

Loss carry forward and back

  • Carried forwards against the profits of the same trade.
  • Carried back against income from the previous tax year.
  • Use of Cash accounting stops loss carry back or sideways relief.

Cessation

  • Losses can be carried back 3 years from cessation.
  • Loses can be carried forward against post incorporation income of the person if they are a director or shareholder f the new company.
  • Use of Cash accounting stops loss carry back or sideways relief.

Post-cessation

  • Relief for bad debts can be claimed against income upto 7 years after cessation.
  • Relief is not available if in connection with tax avoidance arrangements. (Section 9 Finance Act 2012, 04/2012).

Restrictions

  • No relief for losses unless activities are commercial - hobbies, horse racing etc.
  • Farming and market gardening losses restricted if loss making for last 5 years.
  • Sideways loss relief restricted if tax avoidance is a motive.
  • Partnership losses, sideways relief is restricted for non-working partnerships.
  • Members losses of limited partnerships and LLPs restricted to the value of their capital contribution.
  • Loss reliefs, are limited to the higher of £50,000 or 25% of adjusted net income.

Capital allowances

Capital allowances can be used to increase losses. There are limits though for leasing.

  • S75 ITA 2007 a leasing businesses can capital allowances to increase a loss if two conditions are met.
    • the trade must conducted for at least 6 months during the loss making basis period and
    • the individual must devote substantially the whole of his time to the trade in the loss-making basis period.

 

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