Help with self-employment losses

straws

I'm trying to help someone with their self-assessment form, but I'm a bit stuck. 2005-2006 they made a large profit and still owe approx £2000 in tax. 2006-2007 they've made a loss - is there any way they can claim this loss against the 2005-2006 profit and therefore reduce the amount they have to pay? I can't see how this works on the online form.
Hope that makes sense to someone!

straws

Thanks for the link - I'll have a look. He's been self-employed for about 10 years - does that mean there's nothing we can do? I just don't understand the losses section on the self-assessment form.

Murdina

just a quick thought if you were to take up Jimmo's idea - if they have "overlap" relief (esp likely if they were in business pre SA) then this will also crystallise when they cease and could increase the amount of any terminal loss.

straws

The business isn't in trouble, so he won't be ceasing trading, but thanks anyway.
What I don't understand is the tax you pay for 2005-2006 includes a payment on account for 2006-2007 because they assume you will have the same profit, but he has made a loss, so why does he still owe the amount on account?
Can someone explain to me how to carry forward the loss, if that is the only option?

Murdina

the payments on account are a completely separate issue. You can reduce them to zero using form SA303 if you think there is no liability going to arise for the tax year to which they relate. There is a statutory rule that you pay the previous year's liab on account of this year's unless you apply to reduce them. Doing the reduction is quite normal and straightforward. Catch if you get it wrong (which won't apply here if you are sure there are losses for tax) is that you will pay interest to the extent you did not make the original payments as required. Of course, the year after the losses are made, no payments on account will be required.

You can show the loss carried forward on the SA form. You can only offset it against future profits of the same trade. If there is other income in the same tax year on which tax is paid, you could offset the losses against that. The SA form is not brilliant for losses and an accountant would probably put the claim in a letter as well.

straws

Thanks Murdina. So do I send the SA303 form off with the 2006-2007 tax return? I take it I can find it on the HMRC website somewhere.
Is it not too late though, as his tax for 2005-2006 should already have been paid?
My head's starting to hurt now!

Hoddie_2

You can claim to reduce payments on account (POA) over the telephone. If all SA returns are up-to-date (ie to 2005-06) and there was a sole-trader loss for 2006-07, call HMRC and ask to reduce 06-07 POA to nil*. Then ask for a balance. If anything is still due it must relate to 2005-06 (or earlier).

* this is only recommended if you are absolutely sure that no tax will be due for 2006-07.

straws

Thanks - I feel much better about sorting this out now. I'll let you know how you get on.

ade71

A 2006/07 loss can calculated against profits of 2005/06, that is what box 3.86 on the self employed pages is for. If used in this way the losses get far earlier relief than just carrying forward

straws

ade71 wrote: »

A 2006/07 loss can calculated against profits of 2005/06, that is what box 3.86 on the self employed pages is for.

Yes, that's where I thought I should enter the loss, but I couldn't see how it would reduce the amount of tax to pay, as when I looked at the tax calculation page (online), it just said there was no tax to pay for 2006-2007 and didn't mention any reduction for 2005-2006 - maybe they'd send a letter about this after I submit the form?