Making use of trading losses
With the economy hit hard by COVID-19, many businesses will make losses this year. If a business is operated as a limited company, those losses are stuck within the company; they cannot be used against the owner’s personal income.
In contrast, an unincorporated trading business has great flexibility in how losses can be used, including using them to get a repayment of tax paid in earlier years.
If the trade ceases, terminal loss relief allows the loss incurred in the final twelve months of trade to be set against the same trade’s profits of the three tax years before the tax year of cessation.
Where a loss is incurred in any of the first four tax years of trade, that loss can be carried back and used in the three tax years before the year of the loss. The loss is set against total income. This relief is particularly useful when someone has given up a high-paying job to start their own business, as income tax at the higher rates may be repayable.
Once outside the first four tax years of trade, any carry back of a loss against other income is limited to one year.
We can help you quantify your losses and make the claims that will generate the biggest repayments of tax, thus helping your cash flow at this difficult time.