Offsetting Sole Trader Loss Against PAYE

Huba_Huba

Hi - I'm about to submit my self assessment & want to check I've understood the process for offsetting losses. Lets say in a given tax year I earned £20k in a paye job & paid tax of £2k on earnings above £12k (i.e. £8k was subject to tax) - but also in that year started a sole trader business that made a loss of £10k in that tax year. Am I correct in thinking that if I offset £8k of sole trader losses against the paye earnings I'm entitled to a refund of all the paye tax (£2k), and can also offset the residual £2k sole trader losses against previous or subsequent tax years?

Hope that makes sense.

anselld

Yes you can. However, you would need to be able to show that the 10k loss was a legitimate trading business with a reasonable expectation of returning a profit in due course, ie not just some hobby you want to treat as tax deductible.

Huba_Huba

Thats really helpful, yes legit business with premises lease etc. Would you mind confirming that I've got the proportions right in the example I gave - i.e. only offset a sufficient proportion of the trading loss to cover the amount of earnings that were subject to paye, in the example that was £8k.

Thanks again

Dazed_and_confused

It isn't always as straightforward as that, sometimes you have to use all the loss even if it means you have unused Personal Allowance. That might then mean Marriage Allowance is something you* might benefit from . You need to have a read of HS227 on gov.uk regarding the losses.

A lot depends on whether the business is new, ceased etc.

https://www.gov.uk/government/publications/losses-hs227-self-assessment-helpsheet/hs227-losses-2019

*it would be your wife who would benefit financially but you have to apply for it.

Huba_Huba

Thanks, the relevant clause in HS227 says "The loss you claim against income will normally be the whole of the loss. If the loss is more than your income, claim the figure of income". But whats not clear to me when they say 'income' is do they mean my gross income for the year (from that employment), or just the income that was above the tax allowance and subject to paye. If I'm required to write off losses against the gross income this would therefore mean I have to write off loses against that portion of income that fell within my annual tax allowance and was never taxed in the first place. Any ideas which way HMRC enforce this?

Pennywise

Huba_Huba wrote: »

Thanks, the relevant clause in HS227 says "The loss you claim against income will normally be the whole of the loss. If the loss is more than your income, claim the figure of income". But whats not clear to me when they say 'income' is do they mean my gross income for the year (from that employment), or just the income that was above the tax allowance and subject to paye. If I'm required to write off losses against the gross income this would therefore mean I have to write off loses against that portion of income that fell within my annual tax allowance and was never taxed in the first place. Any ideas which way HMRC enforce this?

It's against all income, taxable or not, so if you claim the loss against income in the same year, you will indeed "lose" some of the loss in that it reduces your taxable income below the personal allowance for no benefit.

A few ways to avoid the loss of loss!

Firstly you could set all the loss against an earlier income instead if you have an income of an eligible earlier year higher than the loss.

Or, you can not claim any loss and carry it all forward against future profits.

Or, you can disclaim some of any capital allowances you have claimed, thus reducing the size of the loss to what can usefully be used and having a capital allowance pool to carry forward against which you can claim capital allowances in future years.

Or, you may get a different result if you apply the cash basis or accruals basis (i.e. the "other" basis to which you're basing your figures.

Or, you can use a different accounting period end other than 5/4 which may give you a different loss that you can fully use.

Lots of options!

tebthereb

Someone mentioned “genuine business costs” or something but bear in mind that isn’t strictly speaking the entirety of the first thing you need to consider about trading losses. You need to be operating commercially and with a view to realisation of profit. HMRC’s comments on this are here:

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim85705

Presumably this is not an issue but bear in mind there is always the possibility HMRC could question it.

Huba_Huba

Really helpful info. I think that moving my accounting period away from 5/4 will be the easiest and cleanest way of not 'losing the losses'
Thanks again

Sibbers123

My first question would be are you using the cash basis....

If so, sideways loss relief isn't available.

I would engage an accountant if I were you.

tebthereb

Opening year rules don’t allow you to pick your tax period, it runs from commencement to following 5 April

[Deleted User]

Huba_Huba wrote: »

Really helpful info. I think that moving my accounting period away from 5/4 will be the easiest and cleanest way of not 'losing the losses'
Thanks again

See below which may be of interest

https://forums.moneysavingexpert.com/discussion/5161294