BIM75050 - Trading losses: general matters: when a loss is sustained

The statutory provisions allow a claim where a person has sustained a loss, subject to the claim being made within the time limit (see BIM75200 onwards). We do not insist that loss relief claims should be quantified precisely. A ’best estimate’ claim could be made in advance of accounts being prepared, with the final figure following as soon as possible.

Even if we are satisfied that there is likely to be an economic loss (i.e. the outgoings will exceed all possible income for the period) it is not possible to say that a loss has been sustained for tax purposes until the accounting period is complete.

In the case of Jones v O’Brien [1988] 60TC706, involving Case V income, Hoffman J held that the Revenue could not raise an in-year estimated assessment on income assessed on a current year basis:

Schedule D charges annual profits or gains and tax chargeable under Case V on profits or gains arising in Ireland is computed on the full amount of the income arising in the year of assessment. There is no charge to tax on the income per diem in diem as it arises during the year. In my view the imposition of liability to tax on the full amount of the income arising in a year necessarily entails that the year has elapsed. Until then the profits in respect of which he is liable to tax will not exist and therefore no charge to tax can attach. (714)

ICTA88/S382 (3) provides that losses shall be computed ’in like manner and in respect of the same period’ as profits. This means that the comments in the O’Brien case are equally applicable to losses.

The same principle applies where the results of more than one accounting period are required to compute the profit/loss for a year of assessment.

For example, a trader’s first accounting period may run from 1 December 2000 to 31 January 2001 and give rise to a loss. But loss relief cannot be claimed until all of the periods of account which will contribute to the profit/loss for 2000-2001 are complete. Only then is it possible to say whether a loss has been sustained for 2000-2001.

In a continuing business a trader might contact his or her local office on 28 February 2002, claiming relief from losses sustained as shown in the accounts to 31 October 2001 (2001-02) against general income for 2000-01. In those circumstances there would be no problem, as this would constitute a stand-alone claim (TMA70/SCH1B). We would not need to know the business results for the rest of 2001-02 because they relate to the following year of assessment and all the periods of account (the periods for which accounts are drawn up) which will be included in the basis period in calculating the loss for the year are complete.

It should also be remembered at this stage that a claim to carry back relief relates to the later year, see BIM75200. So although relief is given in terms of the reduced liability of the earlier period, the self assessment for the earlier period is not affected. Payments on account for the later year will be based on the liability for the earlier year before the carry back claim was made.

It may be appropriate however to make a claim to reduce the payments on account for the later year because the total IT and Class 4 NIC payable for the later year (less any tax deducted at source) will be less than the total of the payments on account based on the liability for the previous year.

Example

John draws up his accounts to 31 March, he has net IT and Class 4 liability for 1999-2000 of £10,000. This is payable as follows:

• 1st payment on account 31-1-2000 £4000,
• 2nd payment on account 31-7-2000 £4000,
• balancing payment 31-1-2001 £2000.

The payments on account have been paid but the balancing payment remains outstanding.

Payments on account of £5000 each are set up for 2000-2001, payable on 31-1-2001 and 31- 7-2001. These have not been paid.

On 20 April 2001 he makes a claim to carry back losses from the year 2000-2001 to 1999- 2000, based on a ’best estimate’ of his loss for the year to 31 March 2001. At the same time, he claims to reduce the payments on account for 2000-2001 to £1000 each on the grounds that his net liability for that year will be less than the payments on account based on 1999- 2000.

The estimated loss relief amounts to £5000. He will get the relief as follows:

£2000 is set off against the balancing payment due on 31-1-2001 with an effective date of 20- 4-01.

£1000 is set off against the (revised) first payment on account due on 31-1-2001 with an effective date of 20-4-01 (interest under S86 TMA is due on both these charges, from 31-1- 2001 to 20-4-2001).

• £2000 is repaid (no repayment supplement is payable).

The 2nd payment on account due on 31-7-2001 is £1000.

The same principle applies to all types of claim covered by Schedule 1B.