Posted by Fletcher Accounting and Tax Service Inc.

How to Claim a Tax Refund against Income Losses

How to Claim a Tax Refund against Income Losses

When your business expenses are more than your income, trading loss occurs. While income loss might occur at any time, many things could be responsible. Claiming your tax refund against such losses and how soon the refund will be processed depends on the form of your business – whether partnership, one-man business, or a company.

Partnership and Sole Proprietorship

Your tax returns provide the easiest way to claim a tax refund. It becomes pretty easy if your business is a partnership or sole proprietorship. You can offset your loss in four ways:

  • For your entire income for the present tax year, previous year, or both, you will claim relief. Should you have no income, your capital gains for that year will reduce.
  • You also qualify for relief for income from early years
  • You also qualify for assistance for profit from a similar trade-in early years
  • The loss can be brought forward against future profits using the same trade. 

Also, the entire loss you incurred in the first three years of opening your trade can be carried back. It is essential to make your claim within the time limit.

Claiming for loss relief against income

It is ideal to have your loss relief claim in the Self Assessment tax return. You will have to fill boxes 33-35 for sole proprietors when completing the short self-employment pages. People in partnership needs to complete boxes 22-24 on their partnership pages

For carrying back losses, more information will be required. You need to state the following in the self-employment page:

  • How much will be deducted as a loss to calculate your net income every year
  • The earlier year, provided the loss is brought back for more than a single earlier year

Making tax adjustments for earlier years

You should calculate your tax refund amount when claiming income loss relief concerning earlier years.

  • You need to know the difference between the real tax liability and the liability that will come up each year
  • Input this amount of tax refund. This will go to box 15 of the tax calculation summary pages. 

Carrying forward the loss against future profits

There is the provision to move forward your previous year's loss, or any part of the loss not engaged. This can be done against future trading profits. You can also carry these same set off losses against income from a company. This stands if

  • The shares are yours
  • You exchanged your business with shares in another company

It is vital to deduct the loss from the profit or income of the firm. This should be done every year until the loss is exhausted. You have the grace till 5th April 2020. 

Making claims outside your personal tax return

There are times you might need to make your claim in advance. Known as "stand-alone claim," it is made in advance of the year the loss occurs. When this happens, you are mandated to present a letter to the HMRC, giving them the following details:

  • What your trade is called
  • Your plan for the loss
  • The amount of the loss and the period 

This claim should also be repeated in the tax return of the year the loss occurred. You should supply details of any tax you have paid

Company Losses 

When there is a loss, it can cancel out any gain you make in the same trade. This does not require a claim. This claim is automatic on filling your Company Tax Return. If you, however, carry forward your company losses, waiting till the company bounces back and becomes profitable is inevitable. This means waiting a while before claiming your tax refund. 

Claiming for a loss to be offset is a good idea rather than carrying the loss forward. In this case, the loss will be offset against the last 12 months. This, however, does not apply if you are a startup as your company should have existed for the past 12 months for this to be effective. 

Capital allowances

It would help if you also considered your capital allowance in estimating your loss. There are times when it makes sense to claim a full capital allowance to maximize your tax loss.

Fletcher Accounting and Tax Service Inc.
Contact This Member