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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Is your Charity Trading Tax Exempt?

Charities need to find ways to increase their income and many will explore Trading.

The Taxes Acts provide for a limited exemption from Income Tax or Corporation Tax for the profits of trades carried on by charities. To qualify for exemption the profits must be used solely for the charitable purposes of the charity and the trade must satisfy at least 1 of the following 3 conditions, the:

trade’s a charitable trade (either primary purpose or mainly carried out by beneficiaries) or is ancillary to carrying out a primary purpose of the charity
non-charitable trading turnover falls below the charity’s small trading turnover limit
trading activity is a VAT exempt fundraising event

If a trade doesn’t satisfy 1 of the above conditions, the profits of the trade won’t be exempt from tax regardless of whether or not the profits are used for the purposes of the charity.

Primary purpose trading

A charity’s purposes are stated in its governing document (trust deed, constitution, memorandum and articles of association, etc).

Examples of such primary purpose trading include the:

provision of educational services by a school or college in return for course fees
holding of an exhibition by an art gallery or museum in return for admission fees
sale of tickets for a theatrical production staged by a theatre
provision of health-care services by a hospital in return for payment
provision of serviced residential accommodation by a residential care home in return for payment
sale of certain educational goods by an art gallery or museum

In each of these examples the charity’s carrying out an activity that’s a stated charitable purpose of the charity.

Trading which is ancillary to the carrying out of a primary purpose

Exemption from tax is also extended to other trading which, although not overtly primary purpose in nature, is ancillary to the carrying out of a primary purpose of a charity. This trading can still be said to be exercised in the course of the carrying out of a primary purpose of a charity and is, therefore, part of a primary purpose trade. Examples of trading which qualifies as primary purpose because it is ancillary to the carrying out of a primary purpose are the:

sale of relevant goods or provision of services, for the benefit of students by a school or college (text books, for example)
provision of a crèche for the children of students by a school or college in return for payment
sale of food and drink in a cafeteria to visitors to exhibits by an art gallery or museum (although sale to the general public, as opposed to exhibition visitors, is non-primary purpose trading)
sale of food and drink in a restaurant or bar to members of the audience by a theatre (although sale to the general public, as opposed to the audience, is non-primary purpose trading)
sale by able bodied staff of items produced by the disabled in a disabled workshop
sale of confectionery, toiletries and flowers to patients and their visitors by a hospital

Trading which isn’t wholly charitable trading

Under general case law charities will have only 1 trade. For some charities the trade will be a combination of a charitable trade (primary purpose or carried out by beneficiaries) and partly non-charitable trade (non-primary purpose and not carried out by beneficiaries). For example, the trade might deal in a range of goods or services only some of which are within, or ancillary to, a primary purpose. Or the trade might deal with some customers who cannot properly be regarded as beneficiaries of the charity. Examples of such trading include:

a shop in an art gallery or museum which sells a range of goods, some of which are related to a primary purpose of the charity (direct reproductions of exhibits with no other function, (therefore excluding for example, mugs and postcards), catalogues, etc), and some of which aren’t (promotional pens, mugs, tea towels, stamps, all postcards, etc)
the letting of serviced accommodation for students in term-time (primary purpose), and for tourists out of term (non-primary purpose), by a school or college
the sale of food and drink in a theatre restaurant or bar both to members of the audience (beneficiaries of the charity – ancillary) and the general public (non-beneficiaries – not ancillary)
the operation of a café by a ‘relief of the disabled’ charity where only 50% of the staff are disabled (beneficiaries) and the other 50% aren’t charitable beneficiaries

In these circumstances, the charitable part and the non-charitable part of the trade are deemed to be 2 separate trades – sections 479(2) and (3) CTA 2010 (for corporate charities) and sections 525(2) and (3) ITA 2007 (for charitable trusts) apply. The profit from the deemed charitable trade is exempt from tax, as long as it’s used for charitable purposes. The profit from the deemed non-charitable trade is taxable unless it’s exempt under the small scale trading exemption

How does the small trading exemption apply?

The small trading exemption applies to the profits of all trading activities that aren’t otherwise exempt from tax, provided the:

total turnover from all of the activities does not exceed the small scale trading annual turnover limit
total turnover exceeds the annual turnover limit, the charity had a reasonable expectation that it would not do so
profits are used solely for the purposes of the charity

Calculation of the annual turnover limit

The annual turnover limit is:

£5,000
if the turnover is greater than £5,000, 25% of the charity’s total incoming resources, subject to an overall upper limit of £50,000

Using a subsidiary trading company

You may find this useful if your charity:

makes profits on trading that’s not linked to its primary purpose
makes a profit that comes close to or is higher than the small trading tax exemption limit
wants to protect its assets from any trading losses
wants to have a separate organisation to carry out all its trading activities

Further details are at

https://www.gov.uk/government/publications/charities-detailed-guidance-notes/annex-iv-trading-and-business-activities-basic-principles#primary-purpose-trading

Click to access 20100426%20CFDG%20%20The%20Tax%20implications%20of%20Charity%20Trading%20FINAL%20with%20links.PDF

Click to access CC35.pdf

Click to access CharitiesCanTrade.pdf

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