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Dear sir,
Is it possible to have a brief set of rules for loss relief.
Based on Michael and Sean question of June 2012, I just summarised the rule for initial years and terminal loss. Could you please confirm the same.
Startup losses
1) The loss relief for first year of self employment is available backwards for 3 years and forwards without any restriction,
2) But the important point to remember is that EARLIEST YEAR PROFIT HAS TO BE SET OFF FIRST AND THEN NEXT YEAR, which means, it is not possible to FIRST CLAIM PA AND THEN LOSS RELIEF.
3) The 3 Year C/back is only for first year loss, subsequent year loss c/f restricted to ONLY ONE YEAR.
4) Losses in the first 4 years of trade can be carried back against other income of the 3 previous years.
5) If the loss is c/f then the rider is that it can be SET OFF ONLY AGAINST PROFIT FROM SAME TRADE.Terminal losses
1. When the trade is terminated the losses can be set off 1) either against other income of current year and previous 3 years or set off against trading losses or 3 previous year, STARTING WITH LATEST YEAR FIRST.
2. Both initial year and terminal loss can be carried back for 3 years. The difference between terminal loss and earlier year loss is the in earlier loss 1) the set off should start from earliest year 2) The whole income before PA has to be used, which means PA will be lost. 3) If C/f then set off only against income from same trade.
7. In the case of terminal loss 1) The set off starts from latest year 2) The set off can be limited to trading income only so that PA is not lost.Your statements contain correct, incorrect and sometimes conflicting comments.
OT notes chapter 8 section 5.1 (e) state the options of loss reliefs available in the first 4 tax years of trading:
Total income of preceding 3 tax years on a FIFO basis (special opening years relief)
Total income of current and/or preceding tax year with possible extension claim against chargeable gains
Carry forward against future trading profits of same trade.In the final tax year of trading there is clearly no c/f possible, but the taxpayer may still make the normal claim against total income of current and/or preceding tax years with again the possible extension claim against gains.
There is also available the specialist terminal loss relief for the loss sustained within the last 12 months of trading which may be carried back against the TRADING PROFITS of the preceding 3 tax years on a LIFO basisAny reliefs claimed must be full claims, partial claims are not allowed. Therefore any claims against total income run the risk of wasting the PA whereas a claim against trading profit would still leave any other income (if there is any!) able to absorb the PA.
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