Trading losses

These are difficult times at the moment for established businesses as well as for those just starting up so what if the worst happens and you make a loss?

Well if you’re a sole trader or partnership, there are several options which aren’t available to you if you trade through a limited company.

Generally speaking, the principle reliefs that are available to you are as follows:

1. Trading losses arising in the first four years of the partnership can be carried back and set against any income of the previous three tax years - earliest years first.
   
   For example a 2024/25 loss can be carried back and relieved against any income for the tax years 2021/22, 2022/23 and then 2023/24.
2. If you’re an established business that’s been trading for a number of years, you can make a claim to set off your trading loss against any income for the tax year in which the loss arises and/or any income for the previous year (if the loss is large enough).
   
   For example a 2024/25 loss can be relieved against any income for the tax years 2024/25 and 2023/24.
3. You can carry-forward the loss to reduce any profits for later tax years from the same trade.
   
   This is the most straightforward way of obtaining relief though not necessarily the most tax beneficial.
   
   For example a loss for the year 2024/25 can be relieved against your profits from the same trade for the tax years 2025/26 onwards.
4. If a loss arises when you cease to trade you can claim relief against your trade profits for the final tax year (things can get complicated where the loss straddles a tax year), then carried back against your trading profits of the previous three tax years, latest first.
   
   For example a 2024/25 trading loss arising on the cessation of your business can be offset against your trading profits for the tax years 2023/24, 2022/23 and then 2021/22.
5. A trading loss can be offset against capital gains in either or both the tax year of loss or previous tax year, but only if there is any excess loss available after a claim in point 2 has been made.
   
   For example any excess 2024/25 trading losses can be relieved against 2023/24 and/or 2024/25 capital gains.
6. If you decide to incorporate your partnership into a limited company (as opposed to a LLP) and you have unused trading losses arising from your business, these cannot be carried forward and relieved against the company’s profits.
   
   However you may be able to relieve them against any future income you might draw from the company e.g. salary/dividends etc.

From a tax perspective the principle objectives are to obtain the maximum tax relief at the earliest opportunity. You should also be aware that HM Revenue impose strict time limits on the above loss claims and are highly unlikely to agree a claim submitted outside the time limit.

By working closely with you, we will ensure that the most tax efficient solution is obtained and no important deadlines are missed.