Income Tax losses – What self-employed/sole traders must know

by Abdul Wahab | Nov 10, 2021 | Articles, Uncategorized

• Income tax losses overview
• What kinds of losses your company can experience?
• Limitations on how long you have to file a claim for loss relief?
• How to Get a Tax Refund if You’ve Had a Loss?
• What are the tax consequences under COVID-19 if a self-employed person loses money?
• What can Bloom Financial do for you?

Income tax losses overview

The overall profit is the sum of all net income and net chargeable gains on capital assets. If a company’s income exceeds its costs, it is considered a successful business. If it spends more money to generate revenue than it earns, it is said to be losing money. In most cases, income tax losses are determined over a one-year accounting period.

Trading is frequently the primary source of earnings of a firm, and these are calculated using its worldwide profit before tax indexing in its records. Moreover, for sole traders, any profit and loss on loan generally entails the trading profits and are a separate source of income or loss.

A firm or sole trader may experience loss in one or more of their sources of income. There are three categories of losses that mostly come into contact, trading, property, and non-trading.

Profitable businesses must pay taxes on their earnings. However, if a company is going through a challenging period and isn’t producing enough money or profit, it should check to see whether there is any loss alleviation available.

It is critical to be informed of the many ways in which trading losses of sole traders and trading partners might be alleviated if a firm is going through a period of survival and failure. This article will discuss the types of relives available for businesses and how they can protect themselves in these situations.

What kinds of losses your company can experience?

According to the applicable tax legislation and HMRC guidelines, the following reliefs are available for different types of losses in the UK:

1. Common Trading Losses

This type of loss is measured as a percentage of total income from all sources. In this loss, the government offers relief based on the first available earnings from the same trade.

• Losses sustained in the first four years of trading

This loss is computed as a percentage of total revenue in the previous tax year from all sources.

• Relief from a Terminal Illness (losses arising in final 12 months of trade)

On a last-in, last-out (LIFO) basis, this sort of tax loss is determined for unrelieved terminal losses against earnings of the same trade assessable in the three prior tax years.

• On incorporation, a single trader’s unrelieved trading losses

This tax is applied on income (such as salary, rental income, and dividends) from a company to which the firm that created the losses has been transferred.

Limitations on how long you have to file a claim for loss relief?

A sole trader must file a claim for loss relief within one year of the tax return’s regular filing date for the loss-making year.

For example, a relief claim for losses in 2018/19 may only be filed by January 31, 2021.

However, in some cases, HMRC accepts late claims, but you must file your claim on time to avoid lengthy procedures.

Certain ‘income tax reliefs’ that an individual may claim are subject to limitations. However, restriction on relief for trade losses is carefully enforced by the UK government, and it varies depending on the circumstances in which a corporation is operating.

How to get a Tax Refund if You’ve Had a Loss?

As previously stated, income losses arise when operating expenditures exceed net income. As a result, it becomes evident that any company can go bankrupt at any time. However, sole-traders and new businesses frequently experience significant revenue losses.

When a start-up generates products and services in the early stages of its firm, it may encounter several money management challenges. The primary cause for start-up losses is their unfamiliarity with real-time financial and accounting administration.

The form of business, such as a trading company, a partnership, or a sole-trader, determines how to claim a tax refund for business losses and how quickly you receive that return.

1- Tax relief for sole-traders and partnerships:

For claiming a tax refund, the simplest and quickest method is to file a personal tax return. If you’re a sole-trader or a partnership, you have four options for triggering a loss:

• Deduct any other income from this year’s tax return, the prior year’s tax return, or both.
• For three years, carry back losses accumulated in the first four years of trade. If you’re a sole trader or a partnership, make sure you file your claim before the deadline.
• Claim compensation for profits made in previous years on the same trade.
• Use the loss to offset future earnings from the same deal.

2 – As a self-employed person, claiming loss relief against income

Self-employed people usually file a claim for loss relief on their Self-Assessment tax return.

• If the loss can be traced back to more than one year, you can get a reimbursement.
• If the amount of loss is calculated from the previous year’s net income, you can claim the relief.

3 – Claims made outside of a personal tax return (PTR)

When an individual wants to file a claim before filing their tax return, this is known as a ‘stand-alone claim.’ In this situation, you must write HMRC a letter including the following information:

• Transaction name
• The amount and duration of business loss
• Intensions behind utilising the loss by a person

What are the tax consequences under COVID_19 if a self-employed person loses money?

Losses incurred by self-employed or partnership workers might be deducted from other earnings. Although losses are never desirable, there may be a chance to get a profit from them.

Some Covid-affected firms and self-employed persons who do not qualify for government assistance may be able to profit from a new way to enhance cash flow thanks to the loss carryback provisions.

The Covid Act includes a variety of temporary income tax provisions to assist those affected by the Covid-19 limitations.

There are three factors to consider:

• Self-employed people can ask for their 2020 losses and some unused tax depreciation to be “thrown back” for the 2019 tax year, lowering the amount of income tax owed on such gains.
• Self-employed people can file “interim claims” based on the amount of assistance they expect to get.
• For the tax year 2020, farmers will opt out of income averaging.

What can Bloom Financials do for you?

We strongly concentrate on relief claim and money management experience to assist our clients in identifying, assessing, and decreasing their risk exposure, hence lowering risk costs. For loss-related claim services, we got one of the best consulting teams in the industry.

Businesses, sole traders, and self-employed individuals exposed to various loss recovery claims require specialist advice to assist them in detecting difficulties. We’re dedicated to supporting their clients with loss prevention and claims management. Our expert claims team serves as facilitators and instructors, enhancing our clients’ position at critical periods in their businesses.