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Losses c/b in a farming averaging scenario

In what way can trade losses be carried back when farming averaging is being utilised over 2 years

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Hi. If in 2019/20 the sole trade of a farming business incurs a loss and the previous year incurred a profit, what are the ways the loss can be carried back?  Other income over both years for the individual is employment, partnership, rental income.  In 2018/19 they were in the 41% tax bracket.  

Is it allowable to carry the loss back?  If so, does it go against other income rather than the sole trade profit?

If it can go agianst the sole trade profit, can this be done before farming averaging is applied?

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RLI
By lionofludesch
26th Nov 2020 15:55

41% ? Scottish people ?

They can use the loss in the same way as in pretty much any other scenario. If carrying sideways or back, it's against total income.

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Replying to lionofludesch:
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By andz21
26th Nov 2020 16:44

Yes, it's us Scottish people. We've got to have numerous levels of everything it seems. :-)
Thank you for your help.

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By Tax Dragon
26th Nov 2020 16:51

I was going to go for a Scottish v English clothing joke. But do the English actually have any traditional clothes?!

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Replying to lionofludesch:
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By Tax Dragon
26th Nov 2020 16:46

and for NIC (42% rate?!) yes it's against trade

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By lionofludesch
26th Nov 2020 16:54

Tax Dragon wrote:

and for NIC (42% rate?!) yes it's against trade

You can maybe get 9%* Class 4 relief. You don't have to use the same loss relief for Class 4 as you're using for income tax.

*Or maybe 12%. Who knows what'll be in the Budget ?

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By Tax Dragon
26th Nov 2020 17:05

Ooh, here's a little question. If I set loss sideways for income tax, do I have to do so (as far as possible, which I realise is normally not at all... but here would be) against trade profits for NIC?

And what happens in 19/20 for NIC? Does the loss have to be set against the newly discovered profit?

OK that's maybe more than one question.

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Replying to Tax Dragon:
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By lionofludesch
26th Nov 2020 17:15

Tax Dragon wrote:

Ooh, here's a little question. If I set loss sideways for income tax, do I have to do so (as far as possible, which I realise is normally not at all... but here would be) against trade profits for NIC?

And what happens in 19/20 for NIC? Does the loss have to be set against the newly discovered profit?

OK that's maybe more than one question.

No, they're separate claims under similar but different bits of legislation

A very common scenario is new business makes a loss, carries back for income tax against employment income, has no option but to carry forward for Class 4 NIC, owing to that being their only source of income bearing Class 4 NIC.

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By Tax Dragon
26th Nov 2020 17:27

Yeah the very common scenario is easy (though of course it's easy to forget the NIC bit).

I had something in the back of my mind that thought that an in-year income tax loss claim triggered an NIC one (if one was available). It's not very common, but it would apply in the OP's situation. The back of my mind is not a very trustworthy place, it seems!

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By Tax Dragon
26th Nov 2020 17:32

Tax Dragon wrote:

The back of my mind is not a very trustworthy place, it seems!

(But there must be a rule of that ilk in relation to averaging, as you would agree, I suspect, that averaging for income tax also averages for NIC. NIC is not my forte. Does it show yet? [NIC Dragon is a different entity entirely.])

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By Tax Dragon
27th Nov 2020 11:28

@Lion, I've given NIC Dragon a call (as no-one has corrected me on either thread).

He was quite busy and simply directed me to Sch2 SSCBA 1992. I'm gonna call him back to talk it through (and I didn't have time to raise my Class 1 query before he had to go) but at first blush (paras 2 and 3) this seems to be reinforcing the niggle at the back of my mind.

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By lionofludesch
27th Nov 2020 11:39

To be honest, it's nearly forty years since I had any dealings with farmers.

Love the references to section 380 et seq, though I'd prefer the section 168 et seq of ICTA 1970.

Averaging - does it not just replace the profits (or losses) that you had before with some new ones ? And then you deal with what you've got now.

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By Tax Dragon
27th Nov 2020 12:17

lionofludesch wrote:

Averaging - does it not just replace the profits (or losses) that you had before with some new ones ? And then you deal with what you've got now.

Only profits. Losses are independent. But forget the averaging. You could have any trader with a profit last year and a loss this year. My question was whether, if you carried back this year's loss for IT [set v total income], did you have to do so for Class 4 [set v profit]? And the answer (subject to correction by NIC Dragon/someone in here) is yes.

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Replying to Tax Dragon:
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By lionofludesch
27th Nov 2020 12:30

Tax Dragon wrote:

lionofludesch wrote:

Averaging - does it not just replace the profits (or losses) that you had before with some new ones ? And then you deal with what you've got now.

Only profits. Losses are independent. But forget the averaging. You could have any trader with a profit last year and a loss this year. My question was whether, if you carried back this year's loss for IT [set v total income], did you have to do so for Class 4 [set v profit]? And the answer (subject to correction by NIC Dragon/someone in here) is yes.

No. It's a separate claim for a separate "tax" under separate legislation.

Always has been.

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Replying to lionofludesch:
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By Tax Dragon
27th Nov 2020 12:33

So why does para3 refer to the claims under ITA 2007?

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By Tax Dragon
27th Nov 2020 12:38

Or, same question another angle, can you point me at the (separate claim in the) separate legislation?

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By lionofludesch
27th Nov 2020 14:57

Tax Dragon wrote:

Or, same question another angle, can you point me at the (separate claim in the) separate legislation?

Can you point to where it says you must make the same or corresponding claim for the same loss ?

Because, if that's true, Both I and HMRC have been doing it wrong since 1975.

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By Tax Dragon
27th Nov 2020 15:55

Have you gone all Justin on me?!

I'm thinking it's likely paras 2 & especially 3, as already indicated. TBH though I have looked only briefly. I'll have a longer look*. But not now.

*Also because I haven't (no-one has) answered my other questions - the Class 1 one on the other thread and the one above about what happens Class 4-wise in 2019/20 when you have an averaged profit and a pre-averaged loss butting up against each other. (And because I want another chat with you-know-who.)

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By lionofludesch
27th Nov 2020 16:04

I can't see where you're looking.

Sch 2 is about collection of Class 4, not assessment.

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By Tax Dragon
28th Nov 2020 12:58

You could of course settle the question by pointing to legislation that supports your assertions.

However, I've had a slightly longer look at Sch2. Para 2 is headed "Method of Computing Profits or Gains"; para 3 simply "Reliefs". That sounds quite assessmenty and not very collectiony.

To arbitrate between us, I turned to HMRC's manuals. The opening line of NIM24610 says in one sentence what I have struggled to say in half a dozen posts.

I have no idea what the rules were 40 years ago. Maybe you were right back then. Maybe you weren't. But you're wrong now.

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Replying to Tax Dragon:
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By lionofludesch
28th Nov 2020 13:58

Tax Dragon wrote:

You could of course settle the question by pointing to legislation that supports your assertions.

However, I've had a slightly longer look at Sch2. Para 2 is headed "Method of Computing Profits or Gains"; para 3 simply "Reliefs". That sounds quite assessmenty and not very collectiony.

To arbitrate between us, I turned to HMRC's manuals. The opening line of NIM24610 says in one sentence what I have struggled to say in half a dozen posts.

I have no idea what the rules were 40 years ago. Maybe you were right back then. Maybe you weren't. But you're wrong now.

So you're saying there's no relief for Class 4 NI if the taxpayer chooses, for example, to carry back to a year where there was no self employment income ?

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Replying to lionofludesch:
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By Tax Dragon
28th Nov 2020 14:30

No. I'm saying that when you carry back (income tax) a loss to a year in which there was self employment income, there is (in effect) an automatic claim to carry the loss back for NIC purposes too. The loss is set off against that self employment income.

Clearly if total income > loss > self employment income, you end up using the entire loss for income tax purposes. However you have an amount (loss less self employment income) unused for NIC purposes. That amount is carried forward.

What I'd understood you to be saying was that the carry back for NIC was optional, being a separate claim under separate legislation. It's not. It happens if, and only if, an income tax claim is made.

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RLI
By lionofludesch
28th Nov 2020 14:32

OK - well, it's a bit late to make use of that information.

I've only got a couple of rental income SA returns left.

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By Tax Dragon
28th Nov 2020 19:04

Maybe not for the OP though, eh?

And don't worry, I suspect Coronavirus has cost the country more than Lionesque misdemeanors.

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By Tax Dragon
26th Nov 2020 16:09

And on the averaging point, loss relief is after averaging. (And you average profits, not losses - your 19/20 profit is £Nil.)

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By andz21
26th Nov 2020 16:49

Thank you. I knew 19/20 was treated as nil profit but your wording has made the penny drop. The profit amount does not change before it is split between the 2 tax years and then the 19/20 loss is carried back to 18/19 which will be allocated against total income.

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By Tax Dragon
26th Nov 2020 16:53

Yes. There is no need to set the 19/20 loss against the newly-discovered 19/20 profit. At first it sounds odd, but once you've twigged it's easy.

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By colinhigginson
26th Nov 2020 16:39

Don't forget to look at capital allowance restrictions so you don't waste Personal Allowances. The choices are endless....(well, not quite)

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