When you start your own business, either as a sole trader or as a company, you only wish and aspire to be successful and need not to say, want to make only and only profits. At times the desire to make profit takes over you so much that you forget to make or create buffer for some loss/losses. However, before you start with your business, irrespective of its type and size, it is highly recommendable to do your homework diligently and start with the business only after you have weighed all your options carefully.
Business Losses an Profit
Losses in a business is as inevitable as profit seem to be, however the good news is that there are various options available to use the trading losses and also there are reliefs available depending on the nature of your business i.e. reliefs are different for a sole trader and for a company. When and if your company is making profit, you will be paying taxes on the profits however, when your time takes a u-turn, you need to ensure that whatever relief options are available, you can claim the same.
In a generic view, you can get tax relief by setting off the trading losses against other profits of your business. However, both the loss and the gain need to be of the same accounting period. Here you have the option to either carry the loss back or in case you don’t do so, it will be carried forward to another accounting period.
In order to calculate trading loss, you need to include all capital allowances, any and all balancing charges and certain annuities and charitable donations. Here, you need not include any losses or gains from the sale/disposal of assets.
Also Read: Difference Between Turnover and Profit
Relief Options In Case of a Company Trading Losses:
If you are a company making trading losses, you can either make current year claim or either carry it backward or forward.
In case of current year claim:
In this case, you can set off all your losses against total profits your business has made in that year and while you calculate your total profits, you need to include all types of income and gains before deducting any charitable donations. In other words, it’s an “all or nothing claim”. In other words, as a company, you don’t have an option to relieve only a part of the loss against the total profits made in that period.
In case of carry-back claim:
In case you opt for this option, trading losses can be carried back and set off against the total profits made in the previous 12 months and like current year claim, this is also an “all or nothing claim”, but in this case, you need to first make the current claim before you move on to carry back claim.
In case of carry-forward claim:
If the trading losses are not set against either the current year profits or previous 12 months profits, then the same would be automatically carried forward to the future years and also would be set against the very first future profit. However, if your company cease to trade and has made trading loss in its final 12 months, you have the option to claim terminal loss relief wherein the losses of the final year will be set against the total profits of the previous 36 months i.e. three years. However, you need to make sure that the losses are set first against the profits of the current accounting year before it is carried back to previous years.
Read More: HMRC Corporation Tax
Relief Options In Case of a Sole Trader’s Trading Losses:
As a sole trader you can also claim certain reliefs on trading losses, although the relief options are a bit different from those of a company.
In case of current-year claim:
As a sole trader, you can set your trading losses against your net income i.e. total income minus the deductions. This is an “all-or-nothing” claim so in case the trading losses are more in value than your net income, then it will be reduced to nil.
In case of carry-back claim:
In this case, you have an option to set your trading losses against the net income of previous accounting year. However, unlike it is the case with the company, where you have to first set the losses against current accounting year profits before moving to previous year profits, you as a sole trader, you have the option to choose a current year and a previous year claim in any order.
As a sole trader, if you have made a claim to set your trading loss against the net income of a particular accounting year and some of your loss relief remains unused, you can use either a part of the unused claim or the entire amount as an allowable loss for capital tax gain purposes.