BIM75450 - Trade losses: types of relief: relief for losses made in early years of trade

ITA07/S72 applies where an individual (either as sole proprietor or as partner but not a trustee) makes a loss in a trade, profession or vocation (ITA07/S72(1) and (4)) 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 is relieved as far as possible by reference to his or her total income for the year of assessment ending three years before the end of the year of loss, with any balance by reference to the total income of the next two succeeding years of assessment, the earlier year being taken in priority to the later.

Relief under ITA07/S72 applies to farming (because of ITTOIA/S9).

Where, in addition to a claim to relief under ITA07/S72, a claim is made for the same year for relief under ITA07/S131 (see VCM45000 onwards), the ITA07/S131 relief is to be allowed in priority to relief under ITA07/S72.

Example

Jenny started her business on 1 September 2004 and has an accounting date of 30 June. Her results are as follows:

The loss computations will look like this:

2004-2005

2005-2006

2006-2007

2007-2008

Remember that the overlap profits should be recorded as a permanent note.

The available losses are £23,800 from 2004-2005, £6,867 from 2005-2006 and £60,000 from 2007-2008. Each of these could be carried back to the 3 previous years under ITA07/S72 if the individual had other income, or be the subject of an ITA07/S64 claim. It is up to the individual to choose. For example if Jenny had total income of £15,000 in 2001-2002, this could only be relieved by an ITA07/S72 claim to the losses of 2004-2005. The balance of the 2004-2005 loss, £8,800, would then be relieved by reference to her total income of 2002-2003, if any, and then 2003-2004. 2001-2002 is the ‘earliest year’ in relation to the 2004-2005 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:

The 2006-2007 income in this example is the trading profit for that year.

If we ignore ITA07/S64 relief, Jenny could make the following ITA07/S72 claims:

Only £10,667 of the 2003-2004 income can be relieved, leaving £23,333 still in charge. There is also a balance of losses for 2007-2008 of £5,000 that will be carried forward unless it is set against the other income of the year under an ITA07/S64 claim.