BIM85045 | Trade losses - types of relief: relief for losses made in early years of trade
From HM Revenue & Customs · Business Income Manual
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applies where an individual (either as sole proprietor or as partner but not a trustee) makes a loss in the tax year in which he or she starts to trade or in any of the three succeeding tax years. This relief is not available for losses of 2013-14 to 2023-24 calculated using cash basis, see onwards.
The individual may claim that the loss is relieved as far as possible by deducting it from his or her total income for the three tax years before the one in which the loss is made, the earlier years being taken in priority to the later.
Relief under applies to farming (because of S9 Income (Trading and Other Income) Act 2005).
Where, in addition to a claim to relief under , a claim is made for the same year under for relief for a capital loss on qualifying shares (EIS and initial subscribers - see onwards), the relief is to be allowed in priority to relief under .
Example
Dart started their business on 1 September 2009 and has an accounting date of 30 June. Their results are as follows:
| - | Amount |
|---|---|
| 1 September 2009 to 30 June 2010 | Loss £34,000 |
| 1 July 2010 to 30 June 2011 | Profit £20,000 |
| 1 July 2011 to 30 June 2012 | Loss £60,000 |
The loss computations will look like this:
2009-2010
| - | Amount | |
|---|---|---|
| 01/09/2009 to 05/04/2010 - 7/10 x (34,000) | - | |
| Losses available | (23, 800) | |
| - | Self-assessment Nil |
2010-2011
| - | Amount |
|---|---|
| 01/09/2009 to 31/08/2010 | - |
| 01/09/2009 to 30/06/2010 | (£34,000) |
| Less overlap 2009-2010 | £23,800 |
| - | (£10,200) |
| Plus 01/07/2010 to 31/08/2010 2/12 x £20,000 | £3,333 |
| Losses available | (£6,867) / Self-assessment Nil |
2011-2012
| - | Amount |
|---|---|
| 01/07/2010 to 30/06/2011 | £20,000 |
| Self-assessment | £20,000 |
2012-2013
| - | Amount |
|---|---|
| 1 July 2011 to 30 June 2012 | Loss (£60,000) |
| Losses available | (£60,000) / Self-assessment Nil |
Remember that the overlap profits should be recorded as a permanent note.
| - | Amount |
|---|---|
| 2010-2011 | Nil over 7 months |
| 2011-2012 | £3,333 over 2 months |
| Total overlap profit | £3,333 over 9 months |
The available losses are £23,800 from 2009-2010, £6,867 from 2010-2011 and £60,000 from 2012-2013. Each of these could be carried back to the 3 previous years under if the individual had other income, or be the subject of a claim. It is up to the individual to choose. For example if Dart had total income of £15,000 in 2006-2007, this could only be relieved by a Section 72 claim for the losses of 2009-2010. The balance of the 2009-2010 loss, £8,800, would then be relieved by reference to her total income of 2007-2008, if any, and then 2008-2009. 2006-2007 is the ‘earliest year’ in relation to the 2009-2010 loss and is relieved first.
If we take the loss figures above to work out what claims Dart could make. Their total income is as follows:
| Year | Amount |
|---|---|
| 2006-2007 | £8,000 |
| 2007-2008 | £12,000 |
| 2008-2009 | £34,000 |
| 2009-2010 | £20,000 |
| 2010-2011 | £15,000 |
| 2011-2012 | £20,000 |
| 2012-2013 | £5,000 |
The 2011-2012 income in this example is the trading profit for that year.
If we ignore relief, Dart could make the following claims:
2009-2010
| Amount | Year |
|---|---|
| Loss £23,800: | - |
| £8,000 | 2006-2007 |
| £12,000 | 2007-2008 |
| £3,800 | 2008-2009 |
2010-2011
| Amount | Year |
|---|---|
| Loss £6,867: | - |
| £6,867 | 2008-2009 |
2012-2013
| Amount | Year |
|---|---|
| Loss £60,000: | - |
| £20,000 | 2009-2010 |
| £15,000 | 2010-2011 |
| £20,000 | 2011-2012 |
Only £10,667 of the 2008-2009 income can be relieved, leaving £23,333 still in charge. There is a balance of losses for 2012-2013 of £5,000 that will be carried forward unless it is set against the income of the year under a claim.