BIM85045 - Trade losses - types of relief: relief for losses made in early years of trade
S72 Income Tax Act 2007 (ITA 2007)
S72 ITA 2007 applies where an individual (either as sole proprietor or as partner but not a trustee) makes a loss in the tax year in which he or she starts to trade or in any of the three succeeding tax years. This relief is not available for losses of 2013-14 and subsequent years calculated using cash basis, see BIM70000 onwards.
The individual may claim that the loss is relieved as far as possible by deducting it from his or her total income for the three tax years before the one in which the loss is made, the earlier years being taken in priority to the later.
Relief under S72 ITA 2007 applies to farming (because of S9 Income (Trading and Other Income) Act 2005).
Where, in addition to a claim to relief under S72 ITA 2007, a claim is made for the same year under S131 ITA 2007 for relief for a capital loss on qualifying shares (EIS and initial subscribers - see VCM45000 onwards), the Section 131 relief is to be allowed in priority to relief under Section 72.
Example
Jenny started her business on 1 September 2009 and has an accounting date of 30 June. Her results are as follows:
| - | Amount |
|---|---|
| 1 September 2009 to 30 June 2010 | Loss £34,000 |
| 1 July 2010 to 30 June 2011 | Profit £20,000 |
| 1 July 2011 to 30 June 2012 | Loss £60,000 |
The loss computations will look like this:
2009-2010
| - | Amount | |
|---|---|---|
| 01/09/2009 to 05/04/2010 - 7/10 x (34,000) | - | |
| Losses available | (23, 800) | |
| - | Self-assessment Nil |
2010-2011
| - | Amount |
|---|---|
| 01/09/2009 to 31/08/2010 | - |
| 01/09/2009 to 30/06/2010 | (£34,000) |
| Less overlap 2009-2010 | £23,800 |
| - | (£10,200) |
| Plus 01/07/2010 to 31/08/2010 2/12 x £20,000 | £3,333 |
| Losses available | (£6,867) / Self-assessment Nil |
2011-2012
| - | Amount |
|---|---|
| 01/07/2010 to 30/06/2011 | £20,000 |
| Self-assessment | £20,000 |
2012-2013
| - | Amount |
|---|---|
| 1 July 2011 to 30 June 2012 | Loss (£60,000) |
| Losses available | (£60,000) / Self-assessment Nil |
Remember that the overlap profits should be recorded as a permanent note.
| - | Amount |
|---|---|
| 2010-2011 | Nil over 7 months |
| 2011-2012 | £3,333 over 2 months |
| Total overlap profit | £3,333 over 9 months |
The available losses are £23,800 from 2009-2010, £6,867 from 2010-2011 and £60,000 from 2012-2013. Each of these could be carried back to the 3 previous years under S72 ITA 2007 if the individual had other income, or be the subject of a S64 ITA 2007 claim. It is up to the individual to choose. For example if Jenny had total income of £15,000 in 2006-2007, this could only be relieved by a Section 72 claim for the losses of 2009-2010. The balance of the 2009-2010 loss, £8,800, would then be relieved by reference to her total income of 2007-2008, if any, and then 2008-2009. 2006-2007 is the ‘earliest year’ in relation to the 2009-2010 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:
| Year | Amount |
|---|---|
| 2006-2007 | £8,000 |
| 2007-2008 | £12,000 |
| 2008-2009 | £34,000 |
| 2009-2010 | £20,000 |
| 2010-2011 | £15,000 |
| 2011-2012 | £20,000 |
| 2012-2013 | £5,000 |
The 2011-2012 income in this example is the trading profit for that year.
If we ignore S64 ITA 2007 relief, Jenny could make the following S72 ITA 2007 claims:
2009-2010
| Amount | Year |
|---|---|
| Loss £23,800: | - |
| £8,000 | 2006-2007 |
| £12,000 | 2007-2008 |
| £3,800 | 2008-2009 |
2010-2011
| Amount | Year |
|---|---|
| Loss £6,867: | - |
| £6,867 | 2008-2009 |
2012-2013
| Amount | Year |
|---|---|
| Loss £60,000: | - |
| £20,000 | 2009-2010 |
| £15,000 | 2010-2011 |
| £20,000 | 2011-2012 |
Only £10,667 of the 2008-2009 income can be relieved, leaving £23,333 still in charge. There is a balance of losses for 2012-2013 of £5,000 that will be carried forward unless it is set against the income of the year under a S64 ITA 2007 claim.