HMRC specify that losses for individuals and partners are defined as follows;
If you’re self-employed or a member of a trading partnership you’ll usually make a loss when your trading expenses exceed your trade income.
If you’re a partner, your share of the partnership loss is treated as having arisen from a trade that you carried on alone.
That trade is regarded as having started on the date you became a partner (or the date you started the trade, if you previously carried on the trade on your own account).
It is treated as having ceased on the date you ceased to be a partner (or the date the trade ceased, if you continued to carry on the trade as a sole trader).
There are a number of tax reliefs available for self-employed taxpayers that make a loss carrying on their trade, profession or vocation and for their share of trading losses in any partnerships.
Trade losses may be used in a number of ways against:
- income or possibly against capital gains of the same year or an earlier year
- profit of the same trade
- income from a company to which you transferred your trade.
Not all losses may be claimed in all of these ways and sometimes the amount of loss you claim is limited.
For the 2019-20 tax year, trade losses can be relieved in a number of ways. This includes the following:
- By using the loss to reduce income for the year ended 5 April 2019 and / or 5 April 2018. If there are still further trade losses remaining (after your income has been reduced to nil) then you may be able to set-off all or part of the remaining loss against chargeable gains.
- A claim can also be made for losses made in the first 4 years of trade known as early trade losses relief. Taxpayers need to look at the earliest year first (i.e. 2015-16) and use any remaining loss in 2016-17 and then in 2017-18. This relief is not available if you started your trade before 6 April 2015. The time limit for making claims for 2018 to 2019 losses is 31 January 2021.
- Taxpayers can also carry forward any loss against future profits of the same trade or income from the company (where you transfer your trade to a company in exchange for shares in that company), or post cessation receipts.
- Terminal loss relief is available for businesses that suffer a loss in the last 12 months of trade of a business. Terminal loss relief allows for the carry back of any trading losses that occur in the final 12 months of trading to be set off against profits made during the businesses final tax year or any or all of the previous three tax years.
There is an overall cap on certain Income Tax reliefs. The cap is set at 25% of income or £50,000, whichever is the greater.
Source : Informanagement