We all hope that our businesses will be profitable, but sometimes things don’t go to plan. If so, what are the options?
General Loss Relief
The simplest options for a Sole Trader or Business Partner are:
- Offset against other income of the same year – useful if you work part time in your business and have a job as well, or if its your first tax year in business and you left a job part way through the year.
- Offset against other income of the previous tax year – similar to above
- Carry forward against the same business – you can do this indefinitely – this is the default if you do nothing else
For 1 and 2 – called Sideways Relief – there are some restrictions –
- If you spend less than 10 hours a week on your business, the maximum offset is £25,000
- In all other cases the maximum offset is £50,000
Example – If your Yoga business makes a loss in 2023-24, you can:
– Offset to other income in 2024-24, or other income including your yoga business, if it was profitable, in 2022-23, so long as you are not using Cash Accounting Scheme
– Carry it forward to yoga business profits in 2024-25 or later years
Generally whatever route you choose to offset losses tax law requires you to offset all the loss, up to your total income, even if this means wasting Personal Allowances
Planning points:
- If you are offsetting against current year or previous year other income, make sure it doesn’t take your taxable income below your Personal Allowance, especially if you are expecting to make profits in the future – you would be wasting this years / last years Personal Allowance and paying more tax in future years
- If you anticipate business profits increasing substantially next year so you will be a Higher Rate tax payer, then its better to carry the loss forward to relieve if at Higher Rate than offset this year / last year at Basic Rate
- If you are using the HMRC Cash Accounting Basis for Income Tax, you can only carry losses forward, not offset sideways – See section below.
(Autumn statement 22nd November 2023 proposed to remove this restriction for 2024/25 onward)
These these planning points need judgement, of course.
Example – You had income from Employment this tax year of £15,000 and made a loss of £5,000 in your yoga business, however you anticipate a profit from your yoga business of £20,000 next year
Assume Personal Allowance is £12,500
– If you offset the loss against this years Employment income you will waste £2,500 of Personal Allowance
– If you carry the loss forward to next tax year you will still have income above Personal Allowance levels both years and won’t be wasting allowances
Also, take a look at Case Study 4 – Sally from our Examples and Case Studies for Yoga Teacher’s Tax
Special Situations
There are some special situations where the rules change:
- Early years of a trade – during the first four years of running your business, you can go back three years – earliest year first – and offset to total income.
- Closing a business – you can carry back losses up to three years
- In some circumstances a business loss can be offset to a Capital Gain made in the same year
Cash Accounting Basis
As mentioned above businesses using the Cash Accounting Basis can only carry losses forward, not offset sideways / carry back.
(edit – Autumn statement 22nd November 2023 proposed to remove this restriction for 2024/25 onward)
However there is a trap to be aware of here. Many small businesses don’t give or receive credit – thats to say they receive most/all their income and pay their expenses contemporaneously, and a solo Yoga teacher is typical of this. These businesses get no benefit from the Cash Accounting Scheme as their transactions are on a cash basis (rather than accruals basis) anyway.
In this instance its worth not ticking the “Cash Accounting” box on the Self Assessment form – the Self Assessment itself doesn’t change, but there is more flexibility for dealing with losses.
To understand the difference between Cash Accounting and Accruals Accounting see
Accruals Accounting, Cash Accounting, Simplified Accounting
Limited Companies
The rules are a little different, and you will need advice, as directors salaries and dividends also need considering, however in general:
- You can carry the loss forward
- You can carry it back one year, if the business was profitable in that previous year
- If your company ceases to trade you can carry losses back three years
Do remember these offsets are to Corporation Tax profits of the company, and not against personal income of the Director / Shareholder.
