Sole Trader Tax Breaks When Making a LossWritten on March 27, 2017 by Kirk Rice LLP
The Question:
I was made redundant in the middle of 2016 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. I am expecting to make an overall loss in the 2016/2017 tax year because of all the start up costs. Are there any tax breaks available for this loss?
Kirk Rice LLP answers:
Relief may be available for income tax to a individual who sustains a loss in the course of working as a sole trader. 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 sole trader’s general income assessable in the year in which the loss arose, or against his general income assessable in the 3 years before that in which the loss arose.
Losses incurred in the first four years of trading can be carried back, up to the previous three tax years and set off against general income. There is a cap on the amount of relief that an individual can set against his total income. The limit is the greater of £50,000 or 25% of the individual’s ‘adjusted total income for the year’.
Losses are set off against the earliest year first, i.e. a loss arising in 2016/17 can be carried back to 2013/14 first, then 2014/15, and then 2015/16.
As an alternative, or in respect of losses not relieved as above, the sole 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 2017. You mentioned that you were employed up to mid-2016 and so it will be possible to offset the loss against your employment income for the year to 5 April 2017. 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 2017 as well.
Any reader interested in discussing this topic further can telephone Graham Jennings on 01344 875 000 in our Ascot office or James Moody on 0208 789 8588 in our Putney office or email info@kirkrice.co.uk
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Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.
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