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If you are self employed and your business makes losses you have the following options to use the losses:
- You can reduce your current year tax bill
- You can offset it against earlier years (up to 3 years)
- You can carry your loss forward
You can’t claim:
- if you use cash basis
- where you don’t run your business commercially for profit
- for part of a loss (you must claim the loss in full) – so it could wipe out your personal allowance
- if you are part of a limited liability partnership
- where your losses are tax-generated
If you transfer your business in exchange for shares to another company, you can use any unused losses against your income from the new company.
Further details in HS227
What this might mean is that as a sole trader you waste your personal allowance because your profits are offset to zero by losses, however, if you had a company that paid you £10,600 you would keep your personal tax free allowance and be able to use the losses against the remaining profit.
The rules for company losses are noted below.
Trading losses that you’ve not used in any other way will be offset against profits from the same trade in future accounting periods. You don’t have to make any claim for this to happen. It’s done automatically if you fill in your Company Tax Return.
Corporation Tax Act 2010, Section 45
Carry forward of trade loss against subsequent trade profits
(1)This section applies if, in an accounting period, a company carrying on a trade makes a loss in the trade.
(2)Relief for the loss is given to the company under this section.
(3)The relief is given for that part of the loss for which no relief is given under section 37 or 42 (“the unrelieved loss”).
(4)For this purpose—
(a)the unrelieved loss is carried forward to subsequent accounting periods (so long as the company continues to carry on the trade), and
(b)the profits of the trade of any such period are reduced by the unrelieved loss so far as that loss cannot be used under this paragraph to reduce the profits of an earlier period.
(5)In this section and section 46 references to profits of the trade are references to profits of the trade chargeable to corporation tax.
(6)Relief under this section is subject to restriction or modification in accordance with provisions of the Corporation Tax Acts.
It is not necessary to claim the maximum capital allowances available or even claim them at all, crazy as it might sound there are situations when not claiming capital allowances can reduce your tax bill!
Sole Trader Example
The personal tax allowance is currently £10,600 (2015/16)
Lets assume profits are £15,000 and Capital Allowances available are £5,000, so that would reduce taxable profits to £10,000 which would waste £600 of the personal tax allowance.
It would therefore be better to only claim £4,400 in capital allowances and claim the remaining £600 in the following year.
Companies within a Group can only offset losses in corresponding tax periods, so if the the capital allowances increase the loss in one part of the group beyond the profits of the rest of the group then there would be no benefit to claiming them in that period.
Companies can claim capital allowances in any of the following 3 tax years.
There is an excellent example of this in the following blog http://taxnotes.co.uk/a-basic-introduction-to-capital-allowances/