How can you get a Tax Refund for Trading Losses?

We are facing the worst recession in 300 hundred years, according to Bank of England

Worse than the Napoleonic wars 1812 to 1821

Worse than the Great Depression of the 1930’s

Worse than the 2 World Wars

Worse than the Financial Crash of 2008

The IMF predicts the UK economy will shrink by 6.5% in 2020, compared with the IMF’s January forecast for 1.4% GDP growth.

The Office for Budget Responsibility (OBR) said unemployment could hit 3.4 million – up from 1.3 million – leaving around one in 10 of the working population without a job, while the economy may shrink by 35% between April and June.

Businesses will make losses this year!

How can those losses into cash refunds?

Carry back the losses! Reclaim tax you have previously paid

You will probably need your accountant to help you, here are the basics

Historically most businesses have simply carried forward losses but you can carry them back

Corporation Tax

Instead of carrying a loss forward, you can claim for the loss to be offset against profits for the earlier 12 month period (not accounting period).

You can make a claim to carry back a trading loss when you submit your Company Tax Return for the period when you made the loss.

Self Employed

You may use the loss against your income of 2019 to 2020 or 2018 to 2019 or both years.

You can make this claim for losses made in the first 4 years of trade. Start with 2016 to 2017 income.

If the loss is more than your income use the remaining loss against your income in 2017 to 2018 and then 2018 to 2019.

Do not make this claim if you, your spouse or civil partner first carried on the trade before 6 April 2016.

Corporation Tax – Carry a trading loss back

Instead of carrying a loss forward, you can claim for the loss to be offset against profits for the earlier 12 month period (not accounting period).

You can only do this if your company or organisation was carrying on the same trade at some point in the accounting period or periods that fall in the earlier 12 month period.

For example, if your company or organisation has a loss of £8,000 in the accounting period 1 January 2016 to 31 December 2016 and profits of £20,000 in the earlier 12 months, you can carry back the £8,000 loss to be set off against the profits for the previous accounting year, this will reduce them from £20,000 to £12,000.

If an accounting period straddles that 12 month period, the profit for that period is apportioned and the loss can only be offset against that portion of the profit that falls within the 12 month period.

For example, your company or organisation has a loss of £8,000 in the accounting period 1 January 2016 to 31 December 2016 and it’s recently changed its accounting date, so that the accounting periods and profits of the earlier periods were:

£2,000 for 1 July 2015 to 31 December 2015
£10,000 for 1 July 2014 to 31 July 2015

You can carry back £2,000 of the loss to cover the whole of the profit in the period ended 31 December 2015.

The balance of the loss of £6,000 cannot be entirely carried back as only 6 months of the profits of £10,000 fall into the earlier 12 months of the loss making period.

Only a loss of £5,000 (6/12 x £10,000) can be used, and the balance of £1,000 is available to be carried forward to the year ended 31 December 2017.

How to claim for a trading loss to be carried back, or amend a claim

You can make a claim to carry back a trading loss when you submit your Company Tax Return for the period when you made the loss.

You can make your claim in your return or in an amendment to the return, as long as you’re within the time limit to amend it. You can also make your claim in a letter.

If you’re making a claim in your return that reduces your Corporation Tax liability for an earlier period, you must make sure you have put an ‘X’ in the appropriate box on the CT600 form.

A claim should be made within 2 years of the end of the accounting period when you made the loss. Your claim should include:

the name of your company or organisation
the period when the loss is made
the amount of the loss
how the loss is to be used

If you send your claim separately, send it to HMRC.

https://www.gov.uk/guidance/corporation-tax-calculating-and-claiming-a-loss

Income Tax – Using losses: types of claim

Trade losses may be used in a number of ways against:

income or possibly against capital gains of the same year or an earlier year
profit of the same trade
income from a company to which you transferred your trade.

Not all losses may be claimed in all of these ways and sometimes the amount of loss you claim is restricted or limited.

https://www.gov.uk/government/publications/losses-hs227-self-assessment-helpsheet/hs227-losses-2020

Loss set-off against income or income and capital gains

You may use the loss against your income of 2019 to 2020 or 2018 to 2019 or both years. The loss you claim against income will normally be the whole of the loss. If the loss is more than your income, claim the figure of income. You may be able to use the remaining loss, or part of it, against your chargeable gains.

Loss used against income in 2016 to 2017 to 2018 to 2019: early trade losses relief

You can make this claim for losses made in the first 4 years of trade. Start with 2016 to 2017 income.

If the loss is more than your income use the remaining loss against your income in 2017 to 2018 and then 2018 to 2019.

Do not make this claim if you, your spouse or civil partner first carried on the trade before 6 April 2016.

If you make any of these claims, make sure that you include losses claimed by you other than in your tax return. The section on stand-alone claims gives more on this.

If you use the loss against earlier year’s income or capital gains you must also tell us the:

amount of loss used for each year in the ‘Any other information’ box on the return
decrease in tax due for earlier years

The amount of loss relief you claim against income or capital gains may be restricted or limited for example if you:

worked for less than 10 hours a week on average on commercial activities of the trade
are a Limited Partner or a member of a Limited Liability Partnership
have a trade which is carried on wholly overseas
have claimed certain capital allowances
have income from oil extraction activities or oil rights

If you need more information on any of the restrictions on relief, ask us or your tax adviser.

There’s a limit on the total amount of Income Tax reliefs that you may claim for deduction from total income for a tax year. Loss relief is one of the reliefs affected. The limit is the higher of £50,000 and 25% of the adjusted total income of the year. See Helpsheet 204 if you think you may be affected by this.

Example

Phil has a total income of £70,000 in 2019 to 2020 and makes a trading loss in that year on one of his businesses of £60,000.

The maximum amount of relief Phil can set against his total income for 2019 to 2020 is £50,000 as this is the greater of £50,000 and 25% of his income. The remaining £10,000 loss can be carried forward.

https://www.gov.uk/government/publications/limit-on-income-tax-reliefs-hs204-self-assessment-helpsheet/hs204-limit-on-income-tax-reliefs-2020

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How can I use my property letting losses?

Boot

Landlords need to register for Self Assessment .

They will need to keep track of the rental income and claim allowable expenses

Mortgage or Loan Interest (but not capital)
Repairs and maintenance (but not improvements)
Decorating
Gardening
Cleaning
Travel costs to and from your properties for lettings or meetings
Advertising costs
Agents fees
Buildings and contents insurance
Ground Rent
Accountants Fees
Rent insurance (if you claim the income will need to be declared)
Legal fees relating to eviction

Rent less expenses will either produce a profit or a loss.

Making a loss

If you have residential buy to let properties that you own personally you can deduct any losses from your property letting profit and enter the figure on your Self Assessment form.

You can offset your loss against:

future profits by carrying it forward to a later year
profits from other properties (if you have them)

You can only offset losses against future profits in the same business.

Incorporation

If you incorporate your Buy to Let business, see our blog in incorporation tax relief..

Can a Residential Property Investor use Incorporation Tax Relief?

If you transfer your business in exchange for shares to another company, you can use any unused losses against your income from the new company.

Can you save tax by transferring your self employed losses to a company?

steve@bicknells.net

Can you save tax by transferring your self employed losses to a company?

If you are self employed and your business makes losses you have the following options to use the losses:

You can reduce your current year tax bill
You can offset it against earlier years (up to 3 years)
You can carry your loss forward

You can’t claim:

if you use cash basis
where you don’t run your business commercially for profit
for part of a loss (you must claim the loss in full) – so it could wipe out your personal allowance
if you are part of a limited liability partnership
where your losses are tax-generated

If you transfer your business in exchange for shares to another company, you can use any unused losses against your income from the new company.

Further details in HS227

What this might mean is that as a sole trader you waste your personal allowance because your profits are offset to zero by losses, however, if you had a company that paid you £10,600 you would keep your personal tax free allowance and be able to use the losses against the remaining profit.

The rules for company losses are noted below.

Trading losses that you’ve not used in any other way will be offset against profits from the same trade in future accounting periods. You don’t have to make any claim for this to happen. It’s done automatically if you fill in your Company Tax Return.

Corporation Tax Act 2010, Section 45

Carry forward of trade loss against subsequent trade profits

(1)This section applies if, in an accounting period, a company carrying on a trade makes a loss in the trade.

(2)Relief for the loss is given to the company under this section.

(3)The relief is given for that part of the loss for which no relief is given under section 37 or 42 (“the unrelieved loss”).

(4)For this purpose—

(a)the unrelieved loss is carried forward to subsequent accounting periods (so long as the company continues to carry on the trade), and

(b)the profits of the trade of any such period are reduced by the unrelieved loss so far as that loss cannot be used under this paragraph to reduce the profits of an earlier period.

(5)In this section and section 46 references to profits of the trade are references to profits of the trade chargeable to corporation tax.

(6)Relief under this section is subject to restriction or modification in accordance with provisions of the Corporation Tax Acts.

steve@bicknells.net

If I change my business activity what happens to my tax losses?

Let’s say your current business has been having a tough time and you want to change it to something new, can you carry forward the trading losses.

Probably not look at this example from BIM85050

For example, a publican who had owned a pub in Leeds for many years sold it and bought another in York. Although in the everyday sense the trader remains a publican throughout, the York pub is not the same trade as the Leeds pub.

Tax law requires any losses (including Corporation Tax Losses) carried forward to be offset against future trading profits from the same trade.

One solution to this may be Group Relief, companies which are part of the same Group can surrender losses within the Group.

The rules about which trading losses and other amounts may be surrendered are described at CTM80110. The company that transfers the losses, etc, is called the ‘surrendering company’. The company that claims the losses, etc, is called the ‘claimant company’.

Trading losses, excess capital allowances and non-trading deficits on loan relationships may be surrendered in full. This is irrespective of whether the surrendering company has other profits against which the loss etc might have been, but has not been, set off.

Alternatively it may be possible for the loss making business to sell services to the new business and in doing so reduce its loss.

steve@bicknells.net