It is inevitable that most businesses will experience (some for the first time) losses in this period of repeated lockdowns that never seems to end. Business owners/managers are feeling the heat as the result of these lockdowns continually having negative impact on their businesses and had led to huge losses for many because of some overhead/expenses just cannot be avoided.
In deciding how to relieve your loss effectively, it is important to consider the marginal rates of tax you will be saving, loss of personal allowance and timing. These three important factors are what we put into consideration whilst advising you how to make good use of your loss by getting tax refund in this struggling time.
Sole traders
If you are self-employed or a partner in a business, you will make a loss in your business, whenever your expenses and capital allowances are more than your sales income or turnover for your accounting period. The good news is that your trading losses can be used in a way to generate the most benefit to your business in terms of cash flow.
If you are a sole trader, you have ways to utilize your losses which are explained below:
- The loss from your business can be used against other income you earned outside your business in the tax year under s.64 (ITA 2007). Example of these income are pensionable earnings; property income; interest income or even employment income (if you have another employment alongside your business).
- The loss can be carried back for twelve (12) months to be used against the net income of the previous tax year under s.66 (ITA 2007). This includes your previous trading income and other incomes mentioned earlier.
- The loss can be further extended to relieve your capital gain if you are unable to make full use of your loss. Although, there is restriction, but s.71 (ITA 2007) will allow you to make use of the loss as an allowance loss against your capital gain you made in the tax year.
- The loss can be carried forward to set against future profits of the same trade under s.83 (ITA 2007). This is usually regarded as the last resort as it delays the use of your business losses. Hopefully, businesses should be back to normal with the announcement of vaccines, so there is light at the end of the tunnel.
Howbeit, if you have to close your business and cease trading due of the effect of the various lockdowns; there is still terminal loss relief available to you under s.89 (ITA 2007). Terminal loss (i.e. the loss arising in the final twelve month you stop trading) can be used against the trading profit of the three previous tax years (taking later years first). This could give rise to a significant amount of tax refund if you have paid some taxes in those years.
Limited Companies
Similar to the sole traders and partners, your company might have realised loss due to the lockdowns. There are quite similar options available to relief company’s losses which are explained below:
- Your company’s loss can be set against other incomes from your business such as chargeable gains from sale of assets and/or other property business incomes (if any) in the current year. This is called current year relief which is under s.37(3)a (CTA 2010).
- You also have the option to carry back your company loss to the previous accounting year under s.37(3)(b) (CTA 2010) instead of carrying the loss forward as this could be more beneficial in terms of cash flow. The loss carried back will be set against profit arising in the previous 12 months and if you have already paid your corporation tax in the period, the carried back loss will give rise to a tax refund.
- If your company belongs to a group, instead of claiming current year loss relief or carry back loss relief, it could be beneficial to surrender your company loss to group companies which have profit in the same year to reduce the overall tax liabilities for the group.
- If your company is involved in research and development (you can contact our R&D unit to check your eligibility on this link: https://www.bergenassociates.co.uk/rd-tax-credits/, your trading loss can be surrounded in return for tax refund under the s.1054 (CTA 2009). However, this R&D tax credit can be restricted under the s.1055 (CTA 2009) depending on your qualifying R& expenditure. In terms of cash flow in this period, this is very good option.
Unfortunately, if your company has to close finally due to the effect of the pandemic; similar to the sole traders, you can claim a terminal loss relief if you make a loss in the final period. This terminal loss relief will allow you to carry back the trading loss of 12 months to set against the total profits of three (3) previous years. If corporation taxes had already been paid, this could give rise to significant tax refunds that could go a long way for you during this hard time.
In conclusion, deciding how to choose the most effective use of loss is not always straightforward as there are various options available. Many factors (such tax rates, immediate tax repayment, etc) should be taken into account when making such decision.
It is vital to seek professional help to understand financial importance of the available options. Please contact me on 01224 635616 or olamide.soyombo@bergenassociates.co.uk for more details.
