Sole trader early year losses

Sole trader early year losses

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Haven't done one of these for many a long year! If a sole trader who started in 2014/15 makes a loss I know there are methods of carrying back against the 3 preceding years other income. My question is whether it HAS to be offset against current year income first or if you have flexibility. For example, if the other current year income is less than the personal allowance, off-setting against current year first would be wasteful. Also on a carry back scenario, can you select how much to carry back against each of the three years so as to try and preserve the personal allowance each year, or must the loss be used to extinguish (as far as possible) the total income for each year? Thanks.

Replies (5)

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By Tim Vane
28th Jan 2016 21:25

At the risk of oversimplifying, you must elect which is to be the priority year, then it's an all or nothing election, so use the losses until there is no more income to use up, or the losses are used up. Once the income is used up in the priority year, it can then be allocated to the other year, until either the losses or income is exhausted. If any losses are left after all that, they can be rolled forward. Once rolled forward it must be allocated against the first available profit for the trade, and this again can lead to a waste of personal allowance.

But with loss planning, you have to consider the whole picture and must really understand all aspects and nuances of the various restrictions in order to get the best possible outcome in any situation. It's one area where not knowing all the rules and options can prove very costly.

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By andrew1211
28th Jan 2016 21:32

I think you are saying losses are used against total income thereby losing the benefit of personal allowances. However I am still not sure of the answer to what must be done or can be done with the loss and any 'other income' in the actual year of the loss. I have never heard the term 'priority year' used in this situation....I understood that you go back to the earliest of the first of the potential three years and roll forward the process from there meaning the last of the three years is then the year before the year of the loss.

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RLI
By lionofludesch
29th Jan 2016 07:25

Numbers

Why don't you give us some numbers instead of leaving us to guess ?

You can only (indeed - must) restrict your losses to be set against trading profits if you carry them forward.  All the other methods (so far as I can think) are set against total income. Either can be good or bad, depending on the taxpayer's other income.

Obviously, you can manipulate to some extent by playing with Capital Allowances claims  .....

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By cbp99
29th Jan 2016 08:50

Two options

There are two possibilities (both depend on not using cash basis in CY).

One (S72) is to carry back v 3 earlier years, earliest first, the loss must be used to the fullest extent possible, and the PA is not protected.

Two (S64) is to offset v current and/or previous year (your choice which is used first). Again, the loss must be used in full in whichever year is chosen first.

 

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Replying to Soletrader1990:
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By andrew1211
29th Jan 2016 09:04

Early year losses

cbp99 wrote:

There are two possibilities (both depend on not using cash basis in CY).

One (S72) is to carry back v 3 earlier years, earliest first, the loss must be used to the fullest extent possible, and the PA is not protected.

Two (S64) is to offset v current and/or previous year (your choice which is used first). Again, the loss must be used in full in whichever year is chosen first.

 

Many thanks for the succinct and understandable answer.

 

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