BIM75450 - Trading losses: types of relief: relief for losses sustained in early years of trade
ICTA88/S381 applies where an individual (either as sole
proprietor or as partner but not a trustee) sustains a loss in a
trade, profession or vocation (ICTA88/S381 (1) and (7)) in the year
of assessment in which the individual first carries on that trade
etc. or in any of the three succeeding years of assessment. The
individual may claim that the loss be set as far as possible
against his or her total income for the year of assessment ending
three years before the end of the year of loss, with any balance
set against the total income of the next two succeeding years of
assessment, the earlier year being taken in priority to the later.
Relief under ICTA88/S381 applies to farming (because of
ICTA88/S53).
Losses sustained in a trade carried on abroad, the profits of
which are chargeable under Case V, Schedule D, may be claimed, but
in this case ICTA88/S391 (2) limits the set-off to certain classes
of income.
Where, in addition to a claim to relief under ICTA88/S381, a
claim is made for the same year for relief under ICTA88/S574 (see
VCM45000 onwards), the Section 574 relief is to be allowed in
priority to relief under Section 381.
Example
Jenny started her business on 1 September 1999 and has an accounting date of 30 June. Her results are as follows:
| 1 September 1999 to 30 June 2000 | Loss £34,000 |
| 1 July 2000 to 30 June 2001 | Profit £20,000 |
| 1 July 2001 to 30 June 2002 | Loss £60,000 |
The loss computations will look like this:
1999-2000
| 1 September 1999 to 5 April 2000 | 7/10 x (£34,000) | (£23,800) |
| SA | Nil | Losses available (£23,800) |
2000-01
| 1 September 1999 to 31 August 2000 | |
| 1 September 1999 to 30 June 2000 | (£34,000) |
| Less overlap 1999-2000 | £23,800 |
| (£10,200) | |
| Plus 1 July 2000 to 31 August 2000 2/12 x £20,000 | £3,333 |
| (£6,867) | |
| SA | Nil Losses available (£6,867) |
2001-02
| 1 July 2000 to 30 June 2001 | £20,000 |
| SA | £20,000 |
2002-03
| 1 July 2001 to 30 June 2002 | Loss (£60,000) |
| SA | Nil Losses available (£60,000) |
Remember that the overlap profits should be recorded as a
permanent note.
| 2000-01 | Nil over 7 months |
| 2001-02 | £3,333 over 2 months |
| Total overlap profit | £3,333 over 9 months |
The available losses are £23,800 from 1999-2000,
£6,867 from 2000-01 and £60,000 from 2002-03. Each of
these could be carried back to the 3 previous years under
ICTA88/S381 if the individual had other income, or be the subject
of an ICTA88/S380 claim. It is up to the individual to choose. For
example if Jenny had total income of £15,000 in 1996-97, this
could only be relieved by an ICTA/S381 claim to the losses of
1999-2000. The balance of the 1999- 2000 loss, £8,800, would
then be set against her total income of 1997-98, if any, and then
1998-99. 1996-97 is the ‘earliest year’ in relation to
the 1999-2000 loss and is relieved first.
If we take the loss figures above to work out what claims
Jenny could make. Her total income is as follows:
| 1996-97 | £8,000 |
| 1997-98 | £12,000 |
| 1998-99 | £34,000 |
| 1999-00 | £20,000 |
| 2000-01 | £15,000 |
| 2001-02 | £20,000 |
| 2002-03 | £5,000 |
The 2001-02 income in this example is the trading profit for
that year.
If we ignore ICTA88/S380 relief, Jenny could make the
following ICTA88/S381 claims:
| 1999-2000 | |
| Loss £23,800 used | |
| £8,000 | 1996-97 |
| £12,000 | 1997-98 |
| £3,800 | 1998-99 |
| 2000-2001 | |
| Loss £6,867 used | |
| £6,867 | 1998-99 |
| 2001-02 | |
| Loss £60,000 used | |
| £20,000 | 1999-2000 |
| £15,000 | 2000-01 |
| £20,000 | 2001-02 |
Only £10,667 of the 1998-99 income can be relieved,
leaving £23,333 still in charge. There is also a balance of
losses for 2002-03 of £5,000 that will be carried forward
unless it is set against the other income of the year under an
ICTA88/S380 claim.
