There are special rules for losses incurred in the first four years of commencing trading and terminal loss rules relating to the final twelve months of trading which will not be covered as part of this article.

Current Rules

Currently trading losses may be set against net income of the same tax year and/or the previous year in the order the taxpayer chooses (ITA 2007 Section 64). Once the income of the specified year has been relieved in full, any remaining loss can be set against capital gains tax of the same year (ITA 2007 Section 71 & TCGA 1992 Sub Section 261b).

There are various restrictions, for example for farming losses, non active traders, and traders using the cash basis, that require special consideration and for the sideways relief mentioned above, relief is restricted to £50,000 or 25% of net income cap (ITA 2007 Section 24(a)).

Any loss not used above is carried forward and must be deducted against the first available profits of the same trade.

Proposed New Rules

The draft Finance Bill was published on 11 March 2021 such that losses arising in the 2020/21 and 2021/22 tax years can be carried back against profits of the same trade of the previous three tax years. Carry back losses will be set against later years’ profits before those of earlier years. The trader is expected to make a Section 64 claim first (see above) for at least one of the two years and only then can the unrelieved loss be carried back further under these new provisions.

Options for losses arising in 2020/21

• If Section 64 relief is claimed only against the 2020/21 net income the remaining loss can be carried back against the trade profits of 2019/20, 2018/19 and 2017/18 in this order
• If Section 64 relief is claimed against 2019/20 net income or against the net income of both 2019/20 and 2020/21. The remaining loss can be carried back against the trade profits of 2018/19 and 2017/18
• If a Section 64 claim is not possible because the trader had no other income in either 2019/20 or 2020/21, the loss can still be carried back against past profits of 2018/19 and 2017/18.
• The relief for a 2020/21 loss must be claimed by 31 January 2023

In terms of loss relief we recommend that taxpayers also consider any COVID grants received for their business such as SEISS, CJRS receipts and business support grants, as these form part of trading income. Such grants are taxable in the tax year of receipt regardless of the trader’s basis periods for 2020/21 and 2021/22. This will have an affect on calculation of the trading losses outlined above.