How to claim a tax refund against losses

A businesswoman smiles after successfully claiming a tax refund

** NOTE HMRC have updated their guidance to state they will not be issuing fines for late self assessment tax return submissions until 28 February 2021. However, the deadline of 31 January remains for payments. Late payments will incur interest at 2.6%. HMRC are urging customers to file their self assessment as soon as possible to avoid any last minute problems and to allow sufficient time to apply for a Time to Pay arrangement to pay their tax bill should it be required.

Trading losses occur when your business expenses are greater than your business income. A business may become loss-making at any time - but the most common losses occur in start-ups, when start-up capital may be needed to create products and services

How to claim a tax refund against your losses, and how soon you get that refund, depends on whether you trade as a company, a partnership or a sole trader. Claire Georghiades FCA of AccountsResource explains how to claim your refund.

Sole traders and partnerships

The easiest way and quickest way to claim a tax refund is through your personal tax return. For this, you need to be trading as a sole trader or partnership. The claim is the same for both. There are four ways to set off a loss:

  • You can claim relief against any other income for this tax year, the previous tax year or both. If your income is nil or less than the loss, you can reduce your capital gains for that year.
  • You can claim relief against your income for earlier years.
  • You can claim relief against profits of the same trade in earlier years.
  • You can carry forward the loss against future profits of the same trade.

You can carry back losses incurred in the opening years of a trade for three years. You need to make sure your claim is made within the time limit.

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Claiming for loss relief against income

Normally, you'll make your claim for loss relief in your Self Assessment tax return. For sole traders, if you complete the short self-employment pages, you need to fill in boxes 33-35, or boxes 78-80 in the long self-employment pages. If you are in a partnership, fill in boxes 22-24 on your partnership pages.

If you're carrying back losses, you need to provide additional information in the ‘any other information’ box. This can be done on the self-employment page or on the tax return. You need to state the following:

  • the earlier year, and if the loss is carried back to more than one earlier year;
  • the amount of loss to be deducted in calculating your net income for each earlier year.

Making tax adjustments for earlier years

This is more complicated. If you're claiming loss relief in respective of earlier year(s), you need to calculate the amount of the tax refund.

  • You must calculate the difference between the actual tax liability and the liability that would have arisen for each earlier year.
  • Enter the amount of the tax refund. Put this figure in box 15 on the tax calculation summary pages of a paper return. For an online return, you need to complete the ‘decrease in tax due because of adjustment to an earlier year’ box. This will trigger the loss relief claim.

Carrying forward the loss against future profits

You can also carry forward your 2015-16 loss, or the unused part of the loss, against future trading profits. Or, you can carry forward your 2015-16 loss, or the unused part of the loss against income from a company, provided that

  • you transferred your business to a company in exchange for shares;
  • you still own the shares.

You must deduct the loss from profit in the trade, or income from the company, in the following year and each subsequent year until the loss is used up. The time limit for this claim is 5 April 2020.

Making claims outside your personal tax return

In certain circumstances you may need to make a claim in advance of the year of the loss. This is known as a 'stand alone claim'. In this case, you must write a letter telling HMRC the following details:

  • the name of your trade;
  • how much the loss is and for what period;
  • how you want to use the loss.

You must also repeat the claim in your tax return for the year of loss and give details of the tax repaid or set-off in the ‘any other information’ box on the self-employment pages or on the tax return.

What if I've stopped trading?

If your trade ceased, and you made a loss in the final 12 months of the trade, you can claim relief against profits in the final year of trading. If any loss remains, use this against profit in the trade in the three prior years. Start with the latest year.

The HMRC Helpsheet 222 How to calculate your taxable profits explains this.

Company losses

Trading losses can be offset against profits from the same trade in future accounting periods. You don’t have to make a claim for this. The claim is done automatically when you fill out your Company Tax Return. However, if you carry forward your company losses you will have to wait until the company is profitable. So, you may have to wait a while to claim your tax refund.

Instead of carrying a loss forward, you can claim for the loss to be offset against profits for the preceding 12-month period - but only if your company existed in the preceding 12-month period. This will not work if you are a start-up.

Capital allowances

One more thing to consider when calculating your losses is capital allowances. Is it better to claim full capital allowances to maximise your tax loss? Or, would you be better carrying forward a larger asset pool to reduce your tax bill in the future?

Written by Claire Georghiades FCA of AccountsResource.

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