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3 Example: computation of trade loss

3 Example: computation of trade loss

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3 Trade loss relief against general income
FAST FORWARD

A trading loss may be set against general income in the year of the loss and/or the preceding year.
Personal allowances may be lost as a result of a claim. Once a claim has been made in any year, the
remaining loss can be set against net chargeable gains.

3.1 The relief
Instead of carrying a trade loss forward against future trade profits, a claim may be made to relieve it
against general income.

3.2 Relieving the loss
Relief is against the income of the tax year in which the loss arose. In addition or instead, relief may
be claimed against the income of the preceding year.
If there are losses in two successive years, and relief is claimed against the first year's income both for the
first year's loss and for the second year's loss, relief is given for the first year's loss before the second
year's loss.
A claim for a loss must be made by the 31 January which is 22 months after the end of the tax year of the
loss: thus by 31 January 2018 for a loss in 2015/16.
The taxpayer cannot choose the amount of loss to relieve: thus the loss may have to be set against
income part of which would have been covered by the personal allowance. However, the taxpayer can
choose whether to claim full relief in the current year and then relief in the preceding year for any
remaining loss, or the other way round.

Question

Loss relief against general income

Janet has a loss in her period of account ending 31 December 2015 of £27,000. Her other income is
£20,000 part time employment income a year, and she wishes to claim loss relief against general income
for the year of loss and then for the preceding year. Her trading income in the previous year was £nil.
Show her taxable income for each year, and comment on the effectiveness of the loss relief. Assume that
tax rates and allowances for 2015/16 have always applied.

Answer
The loss-making period ends in 2015/16, so the year of the loss is 2015/16.

Total income
Less loss relief against general income
Net income
Less personal allowance
Taxable income

2014/15
£
20,000
(7,000)
13,000
(10,600)
2,400

2015/16
£
20,000
(20,000)
0
(10,600)
0

In 2015/16, £10,600 of the loss has been wasted because that amount of income would have been
covered by the personal allowance. If Janet just claims loss relief against general income, there is nothing
she can do about this waste of loss relief.

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10: Trading losses  Part B Income tax and national insurance contributions

3.3 Capital allowances
The trader may adjust the size of the loss relief claim by not claiming all the capital allowances he is
entitled to: a reduced claim will increase the balance carried forward to the next year's capital allowances
computation. This may be a useful tax planning point to preserve the personal allowance or where the
effective rate of relief for capital allowances in future periods will be greater than the rate of tax relief
for the loss relief.

Question

Capital allowances and loss relief

Mario is a sole trader making up accounts to 31 December each year. In the year to 31 December 2015, he
makes a trading loss, before taking capital allowances into account, of £7,500. Mario has a tax written
down value on his main pool at 1 January 2015 of £12,000. He does not make any additions or disposals
in the year to 31 December 2015 and does not intend to make any additions or disposals in the year to
31 December 2016.
Mario has gross savings income of £19,000 in 2015/16 and wishes to use trade loss relief against general
income in 2015/16 only (ie without any carry back to 2014/15). He expects to make a trading profit of
£30,000 in the year to 31 December 2016.
What advice would you give Mario?

Answer
Mario should make a reduced capital allowance claim so that the loss relief claim will preserve his
personal allowance in 2015/16.
The maximum capital allowances claim that Mario could make in 2015/16 is £12,000  18% = £2,160. He
should only claim £(19,000 – 7,500 – 10,600) = £900. The tax written down value of the pool at
1 January 2016 will then be £(12,000 – 900) = £11,100 on which Mario can claim the maximum allowance
at 18% for relief in 2016/17.

3.4 Trading losses relieved against capital gains
Where relief is claimed against general income of a given year, the taxpayer may include a further claim to
set the loss against his chargeable gains for the year less any allowable capital losses for the same year
or for previous years. This amount of net gains is computed ignoring the annual exempt amount (see later
in this Text).
The trading loss is first set against general income of the year of the claim, and only any excess loss
is set against capital gains. The taxpayer cannot specify the amount to be set against capital gains, so
the annual exempt amount may be wasted. We include an example here for completeness. You will study
chargeable gains later in this Text and we suggest that you come back to this example at that point.

Question

Loss relief against income and gains

Sibyl had the following results for 2015/16.
Loss available for relief against general income
Income
Capital gains less current year capital losses
Annual exempt amount for capital gains tax purposes
Capital losses brought forward

£
27,000
19,500
15,000
11,100
9,000

Show how the loss would be relieved against income and gains.

Part B Income tax and national insurance contributions  10: Trading losses

151

Answer
Income
Less loss relief against general income
Net income
Capital gains
Less loss relief: lower of £(27,000 – 19,500) = £7,500 (note 1) and
£(15,000 – 9,000) = £6,000 (note 2)
Less annual exempt amount (restricted)

£
19,500
(19,500)
0
15,000
(6,000)
9,000
(9,000)
0

Notes:
1
2

This equals the loss left after the loss relief claim against general income.
This equals the gains left after losses b/fwd but ignoring the annual exempt amount.

A trading loss of £(7,500 – 6,000) = £1,500 is carried forward. Sibyl's personal allowance and £(11,100 –
9,000) = £2,100 of her capital gains tax annual exempt amount are wasted. Her capital losses brought
forward of £9,000 are carried forward to 2016/17. Although we deducted this £9,000 in working out how
much trading loss we were allowed to use in the claim, we do not actually need to use any of the £9,000
as the remaining gain is covered by the annual exempt amount.

3.5 Restrictions on trade loss relief against general income
3.5.1 Commercial basis
FAST FORWARD

Loss relief cannot be claimed against general income unless the loss-making business is conducted on a
commercial basis.
Relief cannot be claimed against general income unless the loss-making business is conducted on a
commercial basis with a view to the realisation of profits throughout the basis period for the tax year.

3.5.2 Relief cap
FAST FORWARD

An individual taxpayer can only deduct the greater of £50,000 and 25% of adjusted total income when
making a claim for loss relief against general income.
There is a restriction on certain deductions which may be made by an individual from total income for
a tax year. For F6 (UK) purposes, the restricted deduction concerns trade loss relief against general
income, whether claimed for the tax year of the loss or the previous year.
The total deductions in a tax year cannot exceed the greater of:
(a)
(b)

Key term

£50,000; and
25% of the taxpayer's adjusted total income for the tax year.

For F6 (UK) purposes, adjusted total income is total income less the gross amounts of personal pension
contributions.
If a claim is made for relief against general income in the previous year, there is no restriction on the
amount of loss that can be used against trading income (of the same trade). The restriction only
applies to the other income in that year. Any restricted loss can still be carried forward against future
profits from the same trade.

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10: Trading losses  Part B Income tax and national insurance contributions

The limits apply in each year for which relief is claimed. If a current year and a prior year claim are
made, the relief in the current year is restricted to the greater of £50,000 and 25% of the adjusted total
income in the current year. The relief in the prior year is restricted to the greater of £50,000 and 25% of
the adjusted total income in the prior year.

Question

Restriction on loss relief

Grace has been trading for many years, preparing accounts to 5 April each year. Her recent results have
been as follows:
Profit/(loss)
£
Year to 5 April 2015
20,000
Year to 5 April 2016
(210,000)
Grace also owns a number of investment properties and her property business income is £130,000 in
2014/15 and £220,000 in 2015/16.
Show Grace's taxable income for the tax years 2014/15 and 2015/16 assuming that she claims relief for
her trading loss against general income in both of those years.

Answer
2014/15
£ £
20,000
130,000
150,000
(70,000)
80,000
(10,600)
69,400

Trading income
Property business income
Total income
Less loss relief against general income
Net income
Less personal allowance
Taxable income

2015/16
£ £
0
220,000
220,000
(55,000)
165,000
(0)
165,000

Loss relief for 2015/16 is capped at £(220,000 × 25%) = £55,000 since this is greater than £50,000. The
personal allowance is not available as adjusted net income exceeds £121,200.
In 2014/15, the loss relief claim is not capped against the trading profit of £20,000. Relief against other
income is capped at £50,000 since this is greater than £(150,000 × 25%) = £37,500. The total loss relief
claim is therefore £(20,000 + 50,000) = £70,000. The balance of the loss is £(210,000 – 55,000 – 70,000)
= £85,000 is carried forward against future profits of the same trade.
Note that the restriction on loss relief means that the loss has been relieved at the additional rate in
2015/16 and at the higher rate in 2014/15. The personal allowance has also been restored for 2014/15.

3.6 The choice between loss reliefs
FAST FORWARD

It is important for a trader to choose the right loss relief, so as to save tax at the highest possible rate and
so as to obtain relief reasonably quickly.
When a trader has a choice between loss reliefs, he should aim to obtain relief both quickly and at the
highest possible tax rate. However, do consider that losses relieved against income which would
otherwise be covered by the personal allowance are wasted. Consideration also needs to be given to any
restriction on loss relief.
Another consideration is that a trading loss cannot be set against the capital gains of a year unless relief is
first claimed against general income of the same year. It may be worth making the claim against income
and wasting the personal allowance in order to avoid a CGT liability.

Part B Income tax and national insurance contributions  10: Trading losses

153

Question

The choice between loss reliefs

Felicity's trading results are as follows.
Trading
profit/(loss)
£
3,900
(21,000)
14,000

Year ended 30 September
2013
2014
2015
Her other income (all non-savings income) is as follows.

£
6,400
33,100
17,600

2013/14
2014/15
2015/16

Show the most efficient use of Felicity's trading loss. Assume that the personal allowance has been
£10,600 throughout.

Answer
Relief could be claimed against general income for 2013/14 and/or 2014/15, with any unused loss being
carried forward. Relief in 2013/14 would be against general income of £(3,900 + 6,400) = £10,300, all of
which would be covered by the personal allowance anyway, so this claim should not be made.
A claim against general income should be made for 2014/15 as this saves tax quicker than a carry forward
claim in 2015/16.
The final results will be as follows:

Trading income
Less carry forward loss relief
Other income
Less loss relief against general income
Net income
Less personal allowance
Taxable income

Exam focus
point

2013/14
£
3,900
(0)
3,900
6,400
10,300
(0)
10,300
(10,600)
0

2014/15
£
0
(0)
0
33,100
33,100
(21,000)
12,100
(10,600)
1,500

2015/16
£
14,000
(0)
14,000
17,600
31,600
(0)
31,600
(10,600)
21,000

Before recommending loss relief against general income consider whether it will result in the waste of the
personal allowance. Such waste is to be avoided if at all possible.

4 Losses in the early years of a trade
4.1 The computation of the loss
Under the rules determining the basis period for the first three tax years of trading, there may be periods
where the basis periods overlap. If profits arise in these periods, they are taxed twice but are relieved later,
usually on cessation. However, a loss in an overlap period can only be relieved once. It must not be double
counted.
If basis periods overlap, a loss in the overlap period is treated as a loss for the earlier tax year only.

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10: Trading losses  Part B Income tax and national insurance contributions

4.2 Example: losses in early years
Here is an example of a trader who starts to trade on 1 July 2015 and makes losses in opening periods.
Period of account

Loss
£
9,000
24,000

P/e 31.12.15
Y/e 31.12.16
Tax year

Basis period

Working

2015/16
2016/17

1.7.15 – 5.4.16
1.1.16 – 31.12.16

£9,000 + (£24,000 × 3/12)
£24,000 less loss already used in
2015/16 (£24,000 × 3/12 = 6,000)

Trade loss for the tax year
£
15,000
18,000

4.3 Example: losses and profits in early years
The rule against using losses twice also applies when losses are netted off against profits in the same
basis period. Here is an example, with a commencement on 1 July 2015.
Period of account

(Loss)/profit
£
(10,000)
24,000

1.7.15 – 30.4.16
1.5.16 – 30.4.17
Tax year

Basis period

Working

2015/16
2016/17

1.7.15 – 5.4.16
1.7.15 – 30.6.16

£(10,000) × 9/10
£24,000 × 2/12 + £(10,000) × 1/10

Trade (Loss)/Profit
£
(9,000)
3,000

4.4 Early trade losses relief
FAST FORWARD

In opening years, a special relief involving the carry back of losses against general income is available.
Losses arising in the first four tax years of a trade may be set against general income in the three years
preceding the loss making year, taking the earliest year first.
Early trade losses relief is available for trading losses incurred in the first four tax years of a trade.
Relief is obtained by setting the allowable loss against general income in the three years preceding the
year of loss, applying the loss to the earliest year first. Thus a loss arising in 2015/16 may be set off
against income in 2012/13, 2013/14 and 2014/15 in that order.
A claim for early trade losses relief applies to all three years automatically, provided that the loss is
large enough. The taxpayer cannot choose to relieve the loss against just one or two of the years, or to
relieve only part of the loss. However, the taxpayer could reduce the size of the loss by not claiming the
full capital allowances available to him. This will result in higher capital allowances in future years.
Claims for the relief must be made by the 31 January which is 22 months after the end of the tax year in
which the loss is incurred.
Early trade losses relief is an alternative to using trade loss relief against general income or using
carry forward loss relief. The advantage of early trade losses relief is that it enables losses to be carried
back for three years and so gives relief earlier than the other loss reliefs. Whether that is advantageous or
not depends on the particular circumstances of the trader, for example whether the trader has any other
income and whether there are different rates of tax in the tax years which might be affected by a particular
loss relief claim.

Part B Income tax and national insurance contributions  10: Trading losses

155

Question

Early trade losses relief

Albert is employed as a dustman until 1 January 2014. On that date he starts up his own business as a
scrap metal merchant, making up his accounts to 30 June each year. His earnings as a dustman are:
£
5,000
6,000
7,000
6,000

2010/11
2011/12
2012/13
2013/14 (nine months)
His trading results as a scrap metal merchant are:

Profit/
(Loss)
£
(3,000)
(1,500)
(1,200)

Six months to 30 June 2014
Year to 30 June 2015
Year to 30 June 2016

Assuming that loss relief is claimed as early as possible, show the net income for each of the years
2010/11 to 2016/17 inclusive.

Answer
Since reliefs are to be claimed as early as possible, early trade loss relief is applied. The losses available
for relief are as follows.
Years against which
relief is available
£
2013/14 (basis period 1.1.14 – 5.4.14)
Three months to 5.4.14 £(3,000) × 3/6
2014/15 (basis period 1.1.14 – 31.12.14)
Three months to 30.6.14
(omit 1.1.14 – 5.4.14 : overlap) £(3,000) ×3/6
Six months to 31.12.14 £(1,500) × 6/12
2015/16 (basis period 1.7.14 – 30.6.15)
Six months to 30.6.15
(omit 1.7.14 – 31.12.14: overlap) £(1,500) × 6/12
2016/17 (basis period 1.7.15 – 30.6.16)
12 months to 30.6.16

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10: Trading losses  Part B Income tax and national insurance contributions

£
(1,500)

2010/11 to 2012/13

(2,250)

2011/12 to 2013/14

(750)

2012/13 to 2014/15

(1,200)

2013/14 to 2015/16

(1,500)
(750)