Running a business at a loss - Tax Issues

scrapbooksarah

Hello,

I'm about to start a business as a sole trader in addition to having a full time job. Having completed a business plan it would appear I am going to have to run at a loss for the first few months due to advertising costs etc until the business has enough trade.

The question is, I currently pay 40% tax in my main job. If my business runs at a loss can the loss I make be be offset against the tax bill from my job?

You no doubt think it's a stupid question but I just thought it is worth a quick question.

the_optimist

This is not a stupid question at all. When you fill in your tax return next year, Mr Taxman will see what you've paid through your job and what profit/ loss your business made, and if you've paid too much tax you will get a rebate.
This happened to me a few years ago. I worked part-time employed and had my own business. I paid a lot of tax through the employment and made only a small profit in my business, so every year I got a nice tax rebate just in time for the summer holidays!

Petmidget

There are 2 important points in this situation.

You can carry back those losses upto 3 years (early trade rules) this will almost certainly be best option. Sometimes it is not financially better but it gives more flexibility should losses continue for longer than anticipated. This is preferable to a current year offset.

Also Class 4 NI losses can only be carried forward or offset. Meaning you will have 2 sets of losses(1 tax/1 NI). The class 4 can be carried fwd against your eventually profits in year 2 (for eg) saving 8p in the £1. This is a pretty regular missed opp for most accountants, as NI is often overlooked and wasted.

jellyang

I too have a paye job & run a small business. Every year I manage to get something back.

The best advice I can give to you is get yourself a good accountant. Most will do small business accountants for a set fee, but make sure they are a reputable firm & not a ranch of cowboys. A good accountant will claim against your tax bill for things you never thought about.

Good Luck with your venture!

martindow

I believe that if you year after year run at a loss the revenue are likely to tell you that it is more a hobby than a business and are not keen on you continuing setting losses against PAYE. If it is only for a year or two and you can show the business is moving towards or into profit, then as has been said there is no problem.