Kevin Read explains the special rules for trading losses arising in the tax year 2023/24.
We are now well into 2023/24, the transitional year for the switch from the current year basis of assessment to the tax year basis for unincorporated businesses and LLPs.
For those without a 31 March or 5 April year end, 2023/24 will see additional months being added to the assessment for the year, with the set-off of overlap profits (usually carried forward from commencement of trade) providing some mitigation. These extra ‘transition profits’ (i.e., the extra months’ profits less overlap profits) are ignored in calculating adjusted net income (relevant for personal allowance abatement and the high income child benefit charge) and are automatically spread over five years beginning in 2023/24, unless a taxpayer elects on a tax return to bring them into charge earlier.
Trading losses
Under the current year basis, on cessation of trade any overlap profits are deducted from the assessment for the final fiscal year.
These overlap profits may increase or create a trading loss which, under the terminal loss relief rules, can be carried back three years against trading profits on a LIFO (last in, first out) basis.
Overlap relief creating losses in the transition year
If the deduction of overlap profits results in a business incurring a loss or increases the loss they would otherwise have made, an extended three-year carry back will be available against profits of the same trade (analogous to the cessation of trade rules above).
However, it is only that portion of the loss which arises from deducting overlap relief that is eligible for this extended carry-back. Any balance of loss is relievable in the normal way, the options being:
1. ITA 2007, s 64
This relief is available against total income (before personal allowance) of:
- the tax year in which the loss-making basis period ends; or
-
the tax year immediately preceding that year.
ITA 2007, s 71 and TCGA 1992, ss 261B and s 261C allow a claim under ITA 2007, s 64 to be extended to gains of either year (once income for that year has been extinguished).
2. ITA 2007, s 83
This allows a trading loss not used in any other way to be automatically carried forward to set against the first available profits of the same trade. As this only gives potential relief against one source of income in the future, rather than any immediate tax saving, it is usually the option of last resort.
However, where a business’s profits are now increasing rapidly post-COVID, this may be the best way of utilising a loss.
Example: Susie goes through transition
Susie is a self-employed trader with the following results:
- Y/e 30 June 2023 £75,000 loss
-
Y/e 30 June 2024 £50,000 profit
Overlap profits brought forward are £30,000.
The basis period for 2023/24 is:
-
Standard - Y/e 30 June 2023 - Loss of £75,000
-
Transitional – 1 July 2023 to 5 April 2024
i.e., (280 days/366 days) x £50,000 38,251
Less overlap profit (30,000)
Transition profits £8,251
Note that in a situation such as this, the transition profits are automatically set against the standard basis period loss to get an overall loss for the year. Spreading is not available.
Susie’s overall loss for 2023/24 is:
Standard basis period (75,000)
Add: transition profits 8,251
Total £(66,749)
£30,000 of this loss results from overlap profit. This amount can be carried back three years against profits of the same trade. The balance of the loss (£36,749) is not eligible for extended carry-back but can be relieved as a normal trading loss.
Practical tip
Carefully consider the best use of losses arising during the transition year. The extended carry-back option is useful where losses derive from deducting overlap profits, but will not necessarily save the most tax.
