Sole Traders - Losses Flashcards
Trade losses Approach to questions Losses in the opening years of trade Terminal losses (41 cards)
When is there a trading loss for tax purposes?
When the adjusted trading profit is negative after all adjustments including capital allowances.
How are losses dealt with for tax purposes?
They are dealt with in tax years, not accounting periods.
Which accounting year ends align with the tax year for assessment purposes?
31 March or 5 April.
What happens to taxable profit in the year a trade makes a loss?
Taxable profit is nil; the loss is not included as a negative figure.
What is the default treatment of trading losses?
They are automatically carried forward to offset future profits from the same trade.
Is a claim required to carry forward a trading loss?
No, it happens automatically.
Can a trader choose which year to use the carried forward loss in?
No, the loss must be used in the first available year of profit.
How can a trading loss be used in the current year?
It can be offset against total income in the same tax year via a claim.
What must be included in a current year loss relief claim?
The maximum amount possible must be claimed, even if it wastes personal allowance.
What is the deadline for claiming current year loss relief for 2024/25?
31 January 2027.
Can a loss be offset against the previous year’s total income?
Yes, through a carry back claim.
Is a claim required for carry back loss relief?
Yes, and it must be for the maximum possible amount.
Can personal allowance be preserved when claiming carry back or current year relief?
No, it cannot be preserved — the loss must be used in full or to reduce income to nil.
What are the available combinations of loss relief claims?
Carry forward only, current year then carry forward, carry back then carry forward, or both carry back and current year before carrying forward any remaining.
What factors influence the choice of loss relief method?
Tax rates in different years, cash flow needs, and preservation of personal allowance.
How are loss claims applied when both current and prior year options are used?
They can be used in any order, and any remaining loss is carried forward.
What is the first step in approaching a trade loss scenario?
Identify all sources of income across relevant tax years and prepare to apply loss relief options.
What should you do once you’ve identified the loss?
Set up a loss memorandum showing how the loss is allocated (carry back, current year, carry forward).
How is a loss carried back used?
It is offset against total income of the previous tax year, and must be claimed for the maximum amount.
What is a key consequence of claiming loss relief against total income?
The claim may waste personal allowance if total income is already below the allowance.
When is it beneficial to avoid using current year or carry back claims?
When other income in those years is less than the personal allowance, to avoid wasting the allowance.
What happens to a loss not used in the current or previous year?
It is carried forward to offset against future profits from the same trade.
How must carried forward losses be applied?
Automatically and fully against the first available trading profits of the same trade.
Can a taxpayer choose the amount of loss to use when claiming against total income?
No — they must claim the maximum possible, even if it wastes personal allowance.
