Tax losses are generally created when your expenditure is more than your income, or in the case of capital losses, when you buy an asset subject to capital gains tax and sell it for less than you paid for it.
The position of limited companies is different to that of sole traders and partnerships.
Companies – losses can be either:
- Carried across and set off against other taxable capital gains or taxable trading profits in the same year.
- Trading losses can be carried back 12 months and only against profits from the same trade.
- Losses can be carried forwards indefinitely but only against profits of the same trade or against future capital gains if capital losses are involved.
- If you cease to trade and make a terminal loss these can be carried back three years. The loss must be offset first against the profits of most recent years before being carried back to earlier years.
Self Employed concerns – individuals can set off losses against:
- Total income of the same tax year.
- Total income of the previous tax year
- If the loss is larger than either income of the current or previous tax years, you can set it against both years
- In some circumstances it may be possible to set off certain trading losses against capital gains of the same tax year.
- As with companies you can also carry losses forwards.
Self employed persons should take care in deciding the best way to utilise losses. Depending on the amount of losses you may lose the use of your personal allowance – effectively reducing your tax losses for no cash benefit.
There are also additional loss reliefs available for individuals in the early years and last year of a business.
If you have any queries regarding losses please give me a call.
Sue Stephens
Tax Manager
