Taking Account

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  • Taking Account

Trading losses - new businesses

June 2007

If you are considering a new business venture, and you know there is likelihood that you will make a trading loss in the first year, be careful when you choose the business status of the trade. i.e. will you be self-employed or a limited company?

Consider the two options in more detail:

Limited company

If you incur a tax trading loss in the first period of trade, a limited company can only carry the losses forward to set off against future profits from the same trade. Consequently it may be some time before the company receives any cash benefit regarding its tax losses as a reduction in future taxes.


If you are self-employed when you make the initial losses the position is very different.

Opening losses in the first four years of assessment in which the trade is carried on may be carried back three years and set against your income of any kind in the preceding three years.

For instance let's assume that you have been employed to 31 December 2006 and have set up a self-employed business from 1 January 2007.

In the first three months of your business, to 31 March 2007, you have made a trading loss of £10,000. It would be possible for you to prepare a short set of accounts to 31 March 2007 and include the loss on your tax return for 2006-2007.

It would then be possible to claim to have the £10,000 loss set off against your other earnings in the same year, 2006-2007.

If all of your other income in the same year was already tax paid that set off of losses would create an immediate tax rebate - for a higher rate tax payer the rebate would be up to £4,000!

This cash refund could be re-introduced to your business at an early date and be used to compensate for the early losses made.


As you can see, being self-employed in the early trading periods may be advantageous - but of course real life is rarely as simple, as set out in the above example.

There may be compelling commercial risks in the new trade that would demand a limited company status for the trade from day one. Even if tax relief from losses was denied for a significant period. ,?p>

If you are considering a new venture and can see that there may be losses in the early months/years please call so that we can examine the tax effects in more detail and settle on the most appropriate structure for your new business. This may give you an opportunity to part fund early losses with early tax refunds!

Hilton Sharp & Clarke