Loss Reliefs

Definition of Loss Reliefs

Loss Reliefs refer to various forms of relief available to sole traders, partnerships, and companies that incur losses, adjusted for tax purposes. This mechanism helps businesses mitigate the financial impact of losses by allowing them to offset these losses against profits of current, previous, or future periods, thereby reducing tax liabilities.

Key Features

1. Capital Allowances: Expenses incurred on business assets can create or enhance trading losses. These allowances are deductions businesses can claim for depreciation on certain assets.

2. Trading Losses for Sole Traders and Partnerships:

   • Set Against Other Income: Trading losses can be offset against other income for the year of the loss and the previous year.
   • Special Early-Year Rules: For new businesses, trading losses incurred in the early years may be carried back three years to a pre-trading period.
   • Against Capital Gains: If trading losses cannot be used against other income, they may be set against capital gains within the same year.

3. Trading Losses for Companies:

   • Previous 12-Month Period: Trading losses can be offset against the profits of the previous 12-month period, provided the company was engaged in the same trade during that period.
   • Capital Losses: These can be set against capital gains within the same year but cannot be utilized to offset other income. Unused capital losses are carried forward to offset future capital gains.

Examples

Example 1: Sole Trader

Emma runs a small bakery and incurs a trading loss of $10,000 in the fiscal year 2022. She can set this loss against her other income from consultancy work in the same year. Alternatively, she can carry it back to 2021 to reduce her taxable income from that year, thereby receiving a tax refund for the previous year.

Example 2: Company

A tech startup, XYZ Inc., incurs a trading loss of $50,000 in 2022. It can offset this loss against its profits from 2021 (previous 12 months) provided it was carrying on the same trade. If the company had a capital gain in 2022 due to a sale of an investment, it cannot use the trading loss to reduce the capital gain, but it can set any capital losses against future capital gains.

Frequently Asked Questions (FAQs)

1. Can trading losses be carried forward indefinitely?

   • For both sole traders and companies, trading losses can generally be carried forward indefinitely to set against future trading profits.

2. Are there any restrictions on carrying back trading losses?

   • Yes, there are restrictions. For sole traders, losses can generally be carried back one year, but losses in the early years of a trade can be carried back three years.

3. Can capital losses be set against other income?

   • No, capital losses can only be set against capital gains, and any surplus must be carried forward to future years.

4. Is there any choice in how losses can be utilized?

   • Yes, particularly for partners in a partnership, who can individually decide how to allocate their share of the trading losses.

5. How do capital allowances affect trading losses?

   • Capital allowances can create or enhance trading losses by allowing businesses to claim depreciation on certain assets, which can then be deducted from taxable profits.

Related Terms

• Capital Allowances: Deductions businesses can claim for the depreciation of certain assets.
• Capital Losses: Losses incurred from the sale of non-operational assets, set against capital gains exclusively.
• Trading Losses: Losses arising from the operational activities of a business.

Online References

1. hmrc.gov.uk: Losses
2. Irs.gov: Business Losses

Suggested Books for Further Studies

1. “Taxation: Finance Act 2022” by Alan Melville: This comprehensive guide covers various aspects of UK taxation, including loss reliefs.
2. “UK Taxation for Students: Finance Act 2022” by Mark Hunt: A student-friendly resource providing in-depth coverage of UK tax rules, suitable for those looking to understand loss reliefs.
3. “Tax By Design” by Stuart Adam, James Browne, and The Mirrlees Review: Provides an insightful look into taxation principles and policies, including mechanisms such as loss reliefs.

Accounting Basics: “Loss Reliefs” Fundamentals Quiz

Thank you for reading this detailed exploration into the world of loss reliefs. Keep pushing the boundaries of your tax knowledge and best of luck on your accounting journey!