If your business spends more than it receives during an accounting period, it has made a trading loss. You can set off trading losses against profit or capital gains in any of the ways discussed below.
If you make a trading loss within any of the first 4 tax years of trading, you can carry it back and set it against your income from any source (but not capital gains) in the previous 3 tax years. You can't pick and choose which years to set the loss against. You must start with the earliest year.
For example, you start a business in January 2021 (in the 21/22 tax year). If you make a loss in the 24/25 tax year, you can set this loss off against your income in the tax years 21/22, 22/23 and 23/24 in that order.
Claiming the loss
You must claim this relief within one year of the 31 January following the tax year of the loss.
HM Revenue & Customs also calls this relief 'Trade Loss Relief against general income'. You can carry the loss across and set it against your other income and capital gains in the year of the loss. This would reduce the income tax you'd otherwise have to pay on other income and/or the capital gains tax you'd otherwise have to pay on the capital gains.
You can also carry the loss backwards. This means the loss can be deducted from your total income and capital gains of the preceding tax year. This could give you a tax refund for the previous tax year. You need to set the loss against total income first and then set any excess loss against capital gains.
Claiming the loss
You must claim this relief within one year of the 31 January following the tax year of the loss. For a loss in 18/19, you must claim by 31 January 2021.
If you suffer a trading loss, you can carry the loss forward. This means the loss will be deducted from profits that the business produces in future accounting periods.
This carry-forward relief may be less appealing to you as you have to wait for future profits of the business before you can benefit from loss relief. Also, this relief is more restrictive in that it only provides for the loss to be set against profits that the business produces - it doesn't provide for relief against other sources of income or against capital gains.
Claiming the loss
You must claim by declaring your intention to use this loss relief within 4 years of the end of the tax year of the loss.
If you suffer a trading loss in the final 12 months in which you do business, you can carry this loss back. This means the loss will be deducted from your trading profit in the 3 tax years before the last year you were trading, taking the later years before the earlier years. You may then reclaim tax from the Inland Revenue that you've already paid. However, you can't set the loss against capital gains or income from sources other than your trade.
Claiming the loss
You must claim this relief within 4 years of the end of the tax year of the loss.
The table below provides a summary of the trading loss relief that a sole trader is entitled to claim.
Type of relief | Time when loss occurred | Income/profits against which loss will be set | Relevant tax year |
---|---|---|---|
Early Trade Losses relief |
Within first 4 tax years of trading |
Any income |
3 tax years preceding loss, starting with earliest |
Carry-across/back relief |
Any accounting year of trading |
Any income and chargeable gains |
The tax year of the loss and the previous tax year |
Carry-forward relief |
Any accounting year of trading |
Subsequent profits of the same trade |
Any subsequent years until loss is absorbed |
Terminal Carry-back relief |
Final 12 months of trading |
Profits of the same trade |
The 3 tax years before the business ceased trading, starting with the latest |