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April 27th 2020

Tax relief for trading losses in the early years of a new trade

Although the Self-Employment Income Support Scheme (SEISS) allows many self-employed individuals to claim a grant to help soften the impact of Covid-19, new business start-ups after 5 April 2019 will not qualify for this grant. Neither will businesses which incurred trade losses in each of the three tax years up to 5 April 2019.

Loss-making start ups may however attract income tax relief in some circumstances. If you are self-employed either as a sole trader, or a partner in a partnership, and your business incurs a trading loss, there are usually different options as to how to use that loss in order to maximise tax savings. Normally, you can only carry a loss back one tax year, but if you are a new business, and you make a loss in any of the first four tax years of trading, you can carry the loss back against taxable income (e.g. employment income) in the previous three tax years.

For example, if you started trading in the period from 6 April 2019 to 5 April 2020, and incurred a trade loss, you can carry this loss back against income earned in the tax year ended 5 April 2017; this effectively reduces your income in that tax year, by the value of the loss. If you had previously paid tax on that income, this will normally result in a tax repayment. If there’s any loss leftover, you can offset it against your income in the year ended 5 April 2018, and so on.

An individual who started up a new business in the four tax years up to 5 April 2020, and incurred a trade loss of £10,000 in the year ended 5 April 2020, would be able to carry the loss back to employment income in the year ended 5 April 2017, or perhaps use the loss in another tax year if more beneficial. In this example a higher-rate taxpayer could potentially receive a tax refund of up to £4,100 from HMRC, while a basic-rate taxpayer could potentially receive a tax refund of up to £2,100.

Trade losses can also be used in the same way for Class 4 National Insurance, so a loss of £10,000 could potentially achieve a further refund of up to £900 if the loss can be offset against profits from another trade.

Whether you are a new business, or you have been trading for many years, a loss can generally be carried back to the previous tax year, or offset against other income in the same year as the loss (for example, if you are employed whilst also running your own business), so it is worthwhile comparing the different trade loss reliefs available, to see which method achieves the greatest tax refund.

We are able to advise business owners on all aspects of income tax loss relief. Contact us today for details.

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