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Individuals with companies should make an effort to take care to use any losses that they make effectively. This will often be of paramount importance for the cashflow of the business and could mean the difference between survival and failure. It is therefore important to be aware of the different ways in which trading losses of sole traders and trading partners can be relieved.
Where a company makes a trading loss, the loss can be relieved by carrying it back and offsetting it against profits of the preceding 12 months. This can only happen as long as the company was carrying on the same trade in accounting periods that fell in the preceding 12 months.
If the loss cannot be utilised by carrying it back to the previous accounting year, it can be carried forward and set against future trading profits.
However, special rules apply to terminal losses.
If the company is a member of a group, the loss can be surrendered to other group companies.
Other restrictions on relief also apply: In 2013, the Finance Act was implemented and placed a limit of certain ‘income tax reliefs’ an individual may claim. Trading losses are included in the list of restricted reliefs.
CBC Ltd makes trading losses of £40,000 in the year ending March 2015. Previously, it made a trading profit of £35,000 in the year ending 31st March 2014.
CBC Ltd tried to make a claim to carry back £35,000 loss to the previous year. This generates a corporation tax repayment of £7000. The balance of the loss, £5000, is to be carried forward to be set-off against future profits.