BIM75625 - Farming losses: five year rule
The loss incurred in a year of assessment is caught by
ICTA88/S397 where a loss computed without regard to capital
allowances is incurred in each of the five preceding years of
assessment. The year of commencement is not counted for this
purpose so, in the case of a new business which makes losses
consistently, the loss of the seventh year of assessment is the
first to be caught.
Example
Henry Green commenced trading as a farmer on 6 April 1997 and
makes up his accounts annually to 31 March. His results were as
follows:
| Period of account | Case I profit or loss (excluding CA) | Capital allowances | |
| Year ended 31.3.98 | Loss £1600 | ||
| Year ended 31.3.99 | Loss £500 | ||
| Year ended 31.3.00 | Loss £1250 | ||
| Year ended 31.3.01 | Loss £3040 | £1240 | |
| Year ended 31.3.02 | Loss £4030 | £930 | |
| Year ended 31.3.03 | Loss £3600 | £1400 | |
| Year ended 31.3.04 | Loss £5750 | £1050 | |
| Year ended 31.3.05 | Loss £4750 | £850 | |
| Year ended 31.3.06 | Loss £5900 | £700 | |
| Year ended 31.3.07 | Profit £900 | £1300 | |
| Year ended 31.3.08 | Loss £7100 | £1000 | |
| Year ended 31.3.09 | Loss £8480 | £880 |
Henry claimed relief under ICTA88/S380 (1), for all available
years. Relief was available or restricted as follows:-
| Year of assessment | Relief available | Explanation |
| 1997-98 | £1600 | |
| 1998-99 | £500 | |
| 1999-00 | £1250 | |
| 2000-01 | £4280 | Relief is available on the full amount of the loss |
| 2001-02 | £4960 | Relief is available on the full loss |
| 2002-03 | £5000 | Relief is available on the full loss. Although a loss was incurred in each of the five preceding years, 1997-98 is disregarded for the purpose of the five year test as it was the year of commencement |
| 2003-04 | Nil | A loss was incurred in each of the five preceding years, which do not include the year of commencement. Section 397 applies. Relief under Sections 380 is denied |
| 2004-05 | Nil | Section 397 still applies Relief under Sections 380 is denied |
| 2005-06 | Nil | Section 397 still applies. Relief under Sections 380 is denied |
| 2006-07 | Nil | Section 397 still applies. Relief under Sections 380 is denied |
| 2007-08 | £8100 | There is a loss before capital allowances in this year but in the previous year of assessment Henry made a profit before capital allowances. The run of consecutive losses computed without regard to capital allowances is therefore broken. A new five year period of consecutive losses will need to be built up before Section 397 can bite again. Relief is available on the loss without restriction |
| 2008-09 | £9360 | Relief is available on the full amount of the loss |
