Business losses for a sole trader or partnership may be utilised in various ways. Firstly losses can be set against other income arising in the year of loss or the previous year.
A loss in incurred in the year in which the trade commences or any of the next three years may set against total income for the previous three years, taking the earliest years first. This is a powerful relief which can generate significant tax repayments to subsidise the early costs of trading.
Where all income is exhausted, any outstanding losses can be set off against any capital gains arising in the current or previous year.
Any losses then remaining would be relieved against profits arising in subsequent years from the same trade.
Losses are only available for these reliefs where the business is being operated with a view to a profit and this is an area which HMRC are increasingly challenging.
This information is courtesy of 2020
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