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  • FIRST POST
    • Huba Huba
    • By Huba Huba 30th Aug 19, 4:07 PM
    • 5Posts
    • 1Thanks
    Huba Huba
    Offsetting Sole Trader Loss Against PAYE
    • #1
    • 30th Aug 19, 4:07 PM
    Offsetting Sole Trader Loss Against PAYE 30th Aug 19 at 4:07 PM
    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.
Page 1
    • anselld
    • By anselld 30th Aug 19, 4:48 PM
    • 6,407 Posts
    • 6,343 Thanks
    anselld
    • #2
    • 30th Aug 19, 4:48 PM
    • #2
    • 30th Aug 19, 4:48 PM
    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
    • By Huba Huba 30th Aug 19, 5:10 PM
    • 5 Posts
    • 1 Thanks
    Huba Huba
    • #3
    • 30th Aug 19, 5:10 PM
    Thanks
    • #3
    • 30th Aug 19, 5:10 PM
    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
    • By Dazed and confused 30th Aug 19, 5:19 PM
    • 5,376 Posts
    • 2,847 Thanks
    Dazed and confused
    • #4
    • 30th Aug 19, 5:19 PM
    • #4
    • 30th Aug 19, 5:19 PM
    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.
    Last edited by Dazed and confused; 30-08-2019 at 5:52 PM.
    • Huba Huba
    • By Huba Huba 30th Aug 19, 5:58 PM
    • 5 Posts
    • 1 Thanks
    Huba Huba
    • #5
    • 30th Aug 19, 5:58 PM
    Thanks
    • #5
    • 30th Aug 19, 5:58 PM
    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
    • By Pennywise 30th Aug 19, 6:04 PM
    • 11,913 Posts
    • 23,232 Thanks
    Pennywise
    • #6
    • 30th Aug 19, 6:04 PM
    • #6
    • 30th Aug 19, 6:04 PM
    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?
    Originally posted by Huba Huba
    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
    • By tebthereb 31st Aug 19, 10:36 AM
    • 130 Posts
    • 38 Thanks
    tebthereb
    • #7
    • 31st Aug 19, 10:36 AM
    • #7
    • 31st Aug 19, 10:36 AM
    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
    • By Huba Huba 31st Aug 19, 10:59 AM
    • 5 Posts
    • 1 Thanks
    Huba Huba
    • #8
    • 31st Aug 19, 10:59 AM
    Thanks Pennywise
    • #8
    • 31st Aug 19, 10:59 AM
    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
    • By Sibbers123 31st Aug 19, 12:25 PM
    • 96 Posts
    • 51 Thanks
    Sibbers123
    • #9
    • 31st Aug 19, 12:25 PM
    • #9
    • 31st Aug 19, 12:25 PM
    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
    • By tebthereb 31st Aug 19, 2:54 PM
    • 130 Posts
    • 38 Thanks
    tebthereb
    Opening year rules don’t allow you to pick your tax period, it runs from commencement to following 5 April
    • purdyoaten2
    • By purdyoaten2 1st Sep 19, 5:47 PM
    • 1,044 Posts
    • 528 Thanks
    purdyoaten2
    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
    Originally posted by Huba Huba
    See below which may be of interest

    https://forums.moneysavingexpert.com/showthread.php?t=5161294
    • Huba Huba
    • By Huba Huba 11th Sep 19, 12:44 PM
    • 5 Posts
    • 1 Thanks
    Huba Huba
    Opening year rules donít allow you to pick your tax period, it runs from commencement to following 5 April
    Originally posted by tebthereb
    Having read the thread suggested by Purdyoaten, it seems that the quote above that you're unable to choose your tax period is incorrect, and that there is indeed some latitude for a new sole trader business to select an accounting period other than 5th/4th.
    • BoGoF
    • By BoGoF 11th Sep 19, 1:17 PM
    • 5,104 Posts
    • 4,918 Thanks
    BoGoF
    Having read the thread suggested by Purdyoaten, it seems that the quote above that you're unable to choose your tax period is incorrect, and that there is indeed some latitude for a new sole trader business to select an accounting period other than 5th/4th.
    Originally posted by Huba Huba
    Perhaps you need to find out the difference between an accounting period and tax period.....two very different things in this context
    • polymaff
    • By polymaff 12th Sep 19, 7:25 PM
    • 2,886 Posts
    • 1,339 Thanks
    polymaff
    This may be the theory - but I've recently noted HMRC adding the (magnitude of the) SE loss claimed to the Personal Allowance.


    Anyone else noticed this bizarre behaviour?
    • tebthereb
    • By tebthereb 13th Sep 19, 4:55 AM
    • 130 Posts
    • 38 Thanks
    tebthereb
    Having read the thread suggested by Purdyoaten, it seems that the quote above that you're unable to choose your tax period is incorrect, and that there is indeed some latitude for a new sole trader business to select an accounting period other than 5th/4th.
    Originally posted by Huba Huba
    Itís definitely correct. You can prepare accounts to whatever period you like but the period assessed to tax is determined by specific legislation.
    • Pennywise
    • By Pennywise 13th Sep 19, 7:16 AM
    • 11,913 Posts
    • 23,232 Thanks
    Pennywise
    Itís definitely correct. You can prepare accounts to whatever period you like but the period assessed to tax is determined by specific legislation.
    Originally posted by tebthereb
    Correct, i.e. if you choose your first "accounting year" to be 1/6/18 to 31/5/19, your 18/19 tax return will declare 10/12ths of the profit/loss.

    Or if you choose a year end of 31 Dec, the 18/19 return will declare all the profit/loss for the period 1/6/18 to 31/12/18 and then 3/12ths of the profit/loss for the subsequent year end 31/12/19.

    This can be exceptionally handy and useful depending on the actual dates/timing of capital expenditure, sales, start up costs, etc. You can actually create a loss by shortening the first "year" or reduce a loss/create a profit by lengthening the first "year".
    • purdyoaten2
    • By purdyoaten2 13th Sep 19, 2:10 PM
    • 1,044 Posts
    • 528 Thanks
    purdyoaten2
    Correct, i.e. if you choose your first "accounting year" to be 1/6/18 to 31/5/19, your 18/19 tax return will declare 10/12ths of the profit/loss.

    Or if you choose a year end of 31 Dec, the 18/19 return will declare all the profit/loss for the period 1/6/18 to 31/12/18 and then 3/12ths of the profit/loss for the subsequent year end 31/12/19.

    This can be exceptionally handy and useful depending on the actual dates/timing of capital expenditure, sales, start up costs, etc. You can actually create a loss by shortening the first "year" or reduce a loss/create a profit by lengthening the first "year".
    Originally posted by Pennywise
    Yes but ( and I know that you are aware of this) one needs to be very careful. The loss, in your example, for the six month period ended would still all relate to 2018/19. This may not be the most advantageous.

    Again using your example let's say that we have a loss for the period 1st June 2018 to 31st December 2018 of £15000. The year to 31st December 2019 shows a profit of £30000.

    If we prepare one set of accounts to 31st December 2018 (seven months) the 2018/19 tax return will include Loss £15000 plus 3/12 of Profit £30000 - resulting in a tax year loss of £7500 which may or may not be relievable.

    2019/20 will be based on £30000 (There will be overlap profits)

    However if only one set of accounts is prepared for the whole period from 1st June 2018 to 31st December 2019 (19 months) we have the following:

    2018/19 10/19 by £15000 (£30000 less loss £15000) = £7894
    2019/20 - 12/19 by £15000 = £9473

    Overlap profits will also arise.

    One would need to look at the individual circumstances of course e.g. loss is fully relieved in the second scenario and no tax to pay in either year.

    In the first example there could be a needless tax bill for 2019/20 on £30000 profits.

    The problem is, of course, that one doesn't know in advance what the profits for 2019/20 will be until well after the date for filing the 2018/19 tax return.

    All part of tax planning.
    Last edited by purdyoaten2; 13-09-2019 at 2:13 PM.
    • Pennywise
    • By Pennywise 13th Sep 19, 6:08 PM
    • 11,913 Posts
    • 23,232 Thanks
    Pennywise
    The problem is, of course, that one doesn't know in advance what the profits for 2019/20 will be until well after the date for filing the 2018/19 tax return.

    All part of tax planning.
    Originally posted by purdyoaten2
    Absolutely agree, but that's where having good book-keeping is worth it's weight in gold, as that means you have accurate figures as each month passes, not only to show what profit/loss is made to date, but also makes is easier to project forward to the missing months.
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