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Taxes

Is a Business Loss Tax Deductible in the UK?

Andre Spiteri
April 25, 2019
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Whatever the reasons for it, a business loss or net operating loss is nothing to celebrate. Nobody likes losing money, especially if you’ve been working hard to build a successful business. Luckily, you can usually claim the lost money on your tax return.Here’s how to go about this.

What is a business loss or net operating loss?

In the UK, a business loss or net operating loss is known as a trading loss. It happens when your business expenses for an accounting period are greater than your income. This applies whether you do business as a sole trader, as a partnership or as a limited liability company.

Example:

Let’s say your accounting period runs from the 6 April to the 5 April.In 2017 / 18, you earned £20,000 but you spent £25,000.This means you’ve made a business loss — or trading loss — of £5,000 in the accounting period ending 6 April 2018.

I’ve made a business loss. Now what?

How you claim a business loss on your taxes depends on whether you’re a sole trader, in a partnership or a limited liability company.

How do I claim lost money on my tax return as a sole trader or partnership?

If you do business as a sole trader or as a partnership, you can deduct your business loss from your taxes in one of the following ways:

  • Find out your total taxable income by totting up everything you earned in the current tax year, including any salary or non-business income such as savings or investments. Set this off against the loss.
  • Deduct the loss from last year’s tax bill. If you make a loss in your fourth year in business, you can set it off against your income for all three previous tax years. Similarly, if you decide to stop trading and make a loss in your last year, you can set it off against your profits for the previous three years.
  • Deduct the loss from your total income in a future tax year.
  • Starting in 2013, tax relief for sole traders and partnerships is capped. You can only claim up to £50,000 or 25 percent of your income as a trading loss, whichever is greater. So, if you make a trading loss of £51,000, you can only claim £50,000.

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How long do I have to claim a business loss?

Typically, you have a year to claim. The year starts running from the 31 January following the loss-making year. So, if you made a loss in 2017 / 18, you have up to the 31 January 2020 to claim.There are two exceptions:1. If you plan to claim on a future tax bill, you have up to four years from the end of the loss-making year. So, if you made the loss in 2017 / 18, you have up to the 5 April 2022 to claim.2. You also have up to four years to claim if you make a loss in your final year in business. So, if you stop trading in 2017 / 18 and make a loss, you have up to the 5 April 2022 to claim.

How do I claim a business loss on my tax return as a limited liability company?

HMRC considers your limited liability company to be a separate person. This means that, if you make a trading loss, you cannot set it off against your personal income, but only against company income.Unlike sole traders and partners, you can’t choose to claim a loss on a previous or future tax bill. You have to set it off against the income for the current tax year. You can then claim the remainder, if any, either on last year’s tax bill or on future tax bills.

Example

Your company earned £20,000 in 2017 / 18. But expenses totaled £30,000.You have to deduct £20,000 from your company’s 2017 / 18 tax bill, which means no corporation tax is due.This leaves £10,000 which you can deduct either from your 2016 / 17 tax bill or your 2018 / 19 tax bill.

In conclusion… And a word of warning

Losing money sucks. But at least, you’ll pay less tax.That said, do be careful.HMRC expects businesses to start making a profit, eventually. Which means year-on-year losses are bound to attract unwanted attention. So do make sure you have a solid business plan to show them, and which will actually help you make money in the long run.

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Whatever the reasons for it, a business loss or net operating loss is nothing to celebrate. Nobody likes losing money, especially if you’ve been working hard to build a successful business. Luckily, you can usually claim the lost money on your tax return.Here’s how to go about this.

What is a business loss or net operating loss?

In the UK, a business loss or net operating loss is known as a trading loss. It happens when your business expenses for an accounting period are greater than your income. This applies whether you do business as a sole trader, as a partnership or as a limited liability company.

Example:

Let’s say your accounting period runs from the 6 April to the 5 April.In 2017 / 18, you earned £20,000 but you spent £25,000.This means you’ve made a business loss — or trading loss — of £5,000 in the accounting period ending 6 April 2018.

I’ve made a business loss. Now what?

How you claim a business loss on your taxes depends on whether you’re a sole trader, in a partnership or a limited liability company.

How do I claim lost money on my tax return as a sole trader or partnership?

If you do business as a sole trader or as a partnership, you can deduct your business loss from your taxes in one of the following ways:

  • Find out your total taxable income by totting up everything you earned in the current tax year, including any salary or non-business income such as savings or investments. Set this off against the loss.
  • Deduct the loss from last year’s tax bill. If you make a loss in your fourth year in business, you can set it off against your income for all three previous tax years. Similarly, if you decide to stop trading and make a loss in your last year, you can set it off against your profits for the previous three years.
  • Deduct the loss from your total income in a future tax year.
  • Starting in 2013, tax relief for sole traders and partnerships is capped. You can only claim up to £50,000 or 25 percent of your income as a trading loss, whichever is greater. So, if you make a trading loss of £51,000, you can only claim £50,000.

How long do I have to claim a business loss?

Typically, you have a year to claim. The year starts running from the 31 January following the loss-making year. So, if you made a loss in 2017 / 18, you have up to the 31 January 2020 to claim.There are two exceptions:1. If you plan to claim on a future tax bill, you have up to four years from the end of the loss-making year. So, if you made the loss in 2017 / 18, you have up to the 5 April 2022 to claim.2. You also have up to four years to claim if you make a loss in your final year in business. So, if you stop trading in 2017 / 18 and make a loss, you have up to the 5 April 2022 to claim.

How do I claim a business loss on my tax return as a limited liability company?

HMRC considers your limited liability company to be a separate person. This means that, if you make a trading loss, you cannot set it off against your personal income, but only against company income.Unlike sole traders and partners, you can’t choose to claim a loss on a previous or future tax bill. You have to set it off against the income for the current tax year. You can then claim the remainder, if any, either on last year’s tax bill or on future tax bills.

Example

Your company earned £20,000 in 2017 / 18. But expenses totaled £30,000.You have to deduct £20,000 from your company’s 2017 / 18 tax bill, which means no corporation tax is due.This leaves £10,000 which you can deduct either from your 2016 / 17 tax bill or your 2018 / 19 tax bill.

In conclusion… And a word of warning

Losing money sucks. But at least, you’ll pay less tax.That said, do be careful.HMRC expects businesses to start making a profit, eventually. Which means year-on-year losses are bound to attract unwanted attention. So do make sure you have a solid business plan to show them, and which will actually help you make money in the long run.

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