Offsetting self-employed losses?

rjwiles

My wife was employed and paying income tax as normal via PAYE from 2008/09 until 2015/16. In May 2016 she became self-employed (sole-trader), however, for legal reasons I can’t go into on here, her business was forced to close in December 2016, just a few months later. This resulted in a trading loss of just over £5,500. She is now employed again (part-time) via PAYE.

I am currently helping her complete her self-assessment tax return and have been reading the HMRC Helpsheet 227 regarding Losses. We are trying to establish whether her self-employed loss can be carried back and set off against her employed income from previous years, but are getting totally confused. There appears to be one rule for new businesses and another rule for businesses that have closed or ceased trading. Nothing seems to cover the scenario where a business starts AND ends in the same tax year.

Ideally, we should employ an accountant, but after several months without work, we simply can’t afford one. Does anyone have any comments or advice? Thanks

Pennywise

First, are you using "simplified" cash basis for working out the loss for the year - this is different from normal accrual accounting. Under the simplified cash basis, you can't set losses against other income, only against future profits, so it's not really appropriate for you. Hence, you'll have to do "accrual" accounting which will make things a little harder - although the end result will be the same, there'll be slightly different ways of dealing with things (put things in different boxes).

The cessation loss rules are an add-on to normal loss rules, but there are also early year loss rules too! You need to think carefully about which is the best way to use the loss. I.e. what marginal tax is being paid in the current year, and past year, and the year before that, etc. It may be better to claim loss relief against last year's other income, or even the year before that, rather than current year, if you paid tax at a higher rate in an earlier year. But, there are strict rules as to the order of relief, so you have to check which of the loss relief rules allows you to maximise the loss relief and then check your eligibility for using that relief (i.e. opening years rules, cessation rules, or normal rules).

But don't forget, you have to account for the value of assets bought, i.e. if you bought something for £1,000, you can usually write it all off, either as an expense under cash accounting, or under capital allowances (AIA) under accrual accounting. In both ways, you need to add back the value of that asset upon the date the business ceased. So your loss may not be as high as you think.

There is no easy answer to any of the above I'm afraid.

rjwiles

Thanks Pennywise.


Am already using "accrual" basis, admittedly as that was the default setting on the accounting software, so that's all good.


My wife's first employed pay day fell in March 2017, so just inside the tax year just ended. At the time, she was put on emergency tax code, so ended up paying tax on all that month's earnings, albeit a relatively small amount. Apart from one small payment of Job Seekers Allowance in February, again less than £100, this was her only other income in 2016/17. So, whatever else we may or may not be able to offset/carry back, she is not liable to pay any tax at all in 2016/17 and we should be able to get her March PAYE deduction refunded.


When you refer to "marginal tax", I assume you mean at what rate has she been paying/will she pay income tax. For 2017/18, it is very likely her earnings will be below the Personal Allowance and so will probably pay no tax at all. For 2015/16 and the years prior, her earnings were around the £13,000 mark, so enough to pay some basic rate tax but nowhere near higher rate tax. Therefore, my impression is we should attempt to carry the loss back to 2015/16 and 2014/15 to offset against income already earned in those years?


Regarding your final point about assets, I found these rules a lot easier to understand and had already managed that calculation exactly as you describe.


Thank you again and I would be delighted to hear any further thoughts if you have the time.