Taxing Times Jul 10

I was made redundant at the end of 2008 and because I was unable to find another job I decided to set up my own business as a sole trader. The business was slow to start although things are going really well now. Up to the end of the last tax year (5 April 2010) I have made a loss because of all the start up costs. Are there any tax breaks available for this loss?  

Answer:

Relief may be available for income tax to a person who sustains a loss in the course of carrying on a trade. Broadly speaking, relief is given by making a reduction in the amount of some other income that is chargeable to tax.

A trading loss may be set against the trader’s general income assessable in the year in which the loss arose or against his general income assessable in the year before that in which the loss arose.

There are also separate rules available for new businesses where a loss is sustained during any of the first four tax years in which the trade is carried on. Here, the loss may be set against income for the three preceding tax years, which may include income arising before the trade was commenced at all.

As an alternative, or in respect of losses not relieved as above, the trader may carry forward losses to set against profits of the same trade in future years. The right to carry forward is only available for as long as the same trade is carried on.

Applying these rules to your situation it would appear that there is an opportunity to obtain tax relief for the loss you have incurred up to 5 April 2010. You mentioned that you were employed up to December 2008 and so it will be possible to offset the loss against your employment income for the year to 5 April 2009. This will trigger a refund of some of the tax you would have paid on your salary then.

Please note that it would be necessary to consider the impact of this on any pension contributions that you may have made during the year to 5 April 2009.

Any reader interested in discussing this topic further can telephone Graham Jennings on 01344 875000 or email graham.jennings@kirkrice.co.uk

Answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.