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Loss relief: How to offset your trading losses and reduce your tax

3rd March 2014

Most businesses incur expenses and losses while they are getting off the ground. Losing money can be a bit of a reality check at times but if you know the tax regulations it’s not all bad news.

Any losses you make can be used to offset other profits in order to reduce your corporation tax.

The methods for doing this will depend on the structure of your business so we’ve taken the liberty of putting together a guide to outline the options.

We’ve not covered all the ways you can use your losses – just the ones that you are most likely to encounter. So without further ado let’s get started…

What you can do if you’re operating through a limited company

If you are operating through a limited company you can count yourself lucky as the situation is quite straightforward.

Any corporation tax losses can be carried forward against future year profits – or carried back against prior year profits from the same trade.

If the company is part of a group then you can offset the loss against the profits of another of the group’s companies.

However, the conditions for group relief are complex so if you think this applies to you we’d recommend seeking professional advice. We’re only a phone call away and more than happy to help so give us a buzz!

How you can use your losses most effectively as a sole trader

For those running their business as a sole trader you have a bit more room to bend and stretch where losses are concerned.

Like limited companies, sole trading losses can be carried back or forwards to be balanced against profits from the same trade.

However, unlike limited companies you’ve got some extra options:

–          Use your losses to offset any other income in the same year (for example employment income or rental income)

–          Use them to offset any other income in the preceding tax year

–          Use them to offset any capital gains in the year of loss or the preceding year

Additionally, any losses you make in your first four years can be carried back against income from up to three years before (sadly this can’t be used against capital gains but you can’t have it all!).

Prior to April 2013, there was no restriction on the sideways loss relief.

However legislation in the Finance Bill 2013 restricted this relief to the greater of £50,000 or 25% of income. HMRC estimated that only 8,000 high earners will be affected by this.

What you can do with losses if you are in a partnership or LLP

This one’s easy – partnership losses can be used in the same way as sole trader losses – just think of a partnership as a shared sole trade. Simple as that!

Hopefully this guide has helped clear things up and shown how you can turn your losses into a positive.

But as ever, if you have any questions and want to chat through your circumstances, do give us a call – we’re only too happy to help.