Profits are a key measure of business success so we know that losses are daunting when you’re just starting out, but it’s really not the end of the world.
There are actually some positives you can glean from a situation like this.
By understanding the relevant rules and regulations, you could reduce the amount of corporation tax you owe by offsetting your losses against your profits.
How your business operates will affect how you can do this, so we thought we’d give you a helping hand by outlining the two most common options.
Loss relief in a limited company
When you’re working through a limited company loss relief is about as simple as it gets.
Losses can be carried forward against future year profits or carried back against prior year profits — though these should be from the same trade.
And there’s more good news; if the limited company is part of a group, your losses can be offset against profits from another company within the same group.
But, it should be noted that there are conditions which surround group relief so we’d always recommend you seek advice to ensure it’s the right path for you.
Loss relief as a sole trader
When working as a sole trader, your losses can be carried backwards or forwards to be offset against profits in the same trade just as limited companies can, but you also have some added flexibility.
Any losses made in your first four years can be carried back against income from up to three years before. (But it is worth nothing that this is restricted to the greater of £50,000 or 25% of income).
Furthermore, you can use your losses to offset any other income – for example rental income – in the preceding tax year or the same tax year, as well as any capital gains in the year of loss of the year before.
Partnership losses can be used in the same way. You should just think of a partnership as a shared sole trade. Simple as that!
Obviously, this is not an exhaustive list, but hopefully it has helped to clarify things a little.
However, if you’re unsure or you’d like some advice tailored to your own circumstances then we’re only a phone call away.