Losses - are they a bad thing?

With the Winter Olympics in Pyeongchang coming to a close, the athletes will be looking back on their wins and losses. Some of the losses would have been more painful than others, whether it's crashing out of the speed skating or failing to land a jump in freestyle skiing.
But is a loss always a bad thing?
For self-employed individuals there are options available to utilise any trade losses incurred:

 

  1. Carry them forward
With many businesses making a loss in their first year of trade, the option to carry the trade loss forward can be invaluable. Here, the loss will be carried forward and offset against future profits of the same trade. This can lead to lower tax liabilities in future years and free up cash to use in the business to help it grow.
 
  1. Offset them against other income in the same or previous year
If the individual had any other income during the previous or current year, such as rental or employment income, the trade loss can be offset against this income. This can reduce the tax liability for the year and also potentially allow the individual to reclaim some tax that has already been paid. If the loss is large enough, any remaining loss may be offset against any chargeable gains. The individual can decide whether to utilise the loss in the previous year, current year or both.

 

  1. Early trade losses relief
A loss incurred in the first four years of trade can be carried back to the previous three tax years. The loss will be offset on a first in first out basis, where the loss will be offset against the earliest tax year first. This can lead to a tax refund which can be used to grow the business.
 
  1. Terminal loss relief
If the sole trader ceases to trade, terminal loss relief can be claimed. Here any losses in the final 12 months of the trade can be offset against profits in the final tax year and the preceding three tax years on a last in first out basis, meaning the loss will be offset against the most recent year first.
 
As can be seen, there are options available to ease the pain when a making a loss, whether it is in the early or final years of trade. Tax planning is required to make efficient use of the losses, so please contact your local Perrys branch today.
 
Article written by Jason Maunick