BIM85630 - Farming losses: loss considered is loss incurred in year to 5 April

S67, S70 Income Tax Act 2007

In determining for the purpose of the five year test whether a loss was incurred in any particular tax year, the period to be taken is the year to 5 April. Where accounts are made up to a date other than 5 April, it may therefore be necessary to apportion the results of different periods of account.

Example

Marjorie Brown trading as a farmer of long standing makes up her accounts annually to 31 December. Her results were as follows:

Year ended	Trade profit or loss before capital allowances
Year ended 31.12.14	Loss £3700
Year ended 31.12.15	Loss £1100
Year ended 31.12.16	Loss £4800
Year ended 31.12.17	Loss £7000
Year ended 31.12.18	Loss £2600
Year ended 31.12.19	Profit £1200
Year ended 31.12.20	Loss £4400
Year ended 31.12.21	Loss £5300

Marjorie claims trade loss relief against general income for 2020-21. At first sight it may appear that the five year rule does not apply as she made a profit in the year ended 31 December 2019. A different picture emerges however when profits or losses are computed by reference to tax years.

Tax year	-	Losses
2015-16	(270/365 x L £1100 = L £814) + (95/366 x L £4800 = L £1246)	= Loss £2060
2016-17	(270/366 x L £4800 = L £3541) + (96/365 x L £7000 = L £1841)	= Loss £5382
2017-18	(270/365 x L £7000 = L £5164) + (95/365 x L £2600 = L £677)	= Loss £5841
2018-19	(270/365 x L £2600 = L £1923) + (95/365 x P £1200 = P £312)	= Loss £1611
2019-20	(270/365 x P £1200 = P £888) + (95/366 x L £4400 = L £1142)	= Loss £254
2020-21	(270/366 x L £4400 = L £3246) + (96/365 x L £5300 = L £1394)	= Loss £4640

We can now see that she made a trading loss, computed without regard to capital allowances, in each of the five preceding tax years. The five year rule therefore applies and the loss incurred for the year ended 31.12.2020 of £4400 is not available for trade loss relief against general income.