Claim back taxes by loss planning

7 July 2009

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Losses are rarely a good thing in business, but the one advantage they have is the likely return of tax you or your business have paid, which certainly sounds better than having it used for moat cleaning!

Maximising the amount and speed of reclaiming cash does involve knowing the rules, they aren't as wide as MPs' expense rules, but they do have some flexibility which can be missed.

Individuals

Let's start with the rules for individuals in business trading personally, or in partnership but not through a company.

You can take £50,000 of losses back up to three years. This is a temporary measure with strict time limits.
You can offset losses against other types of income and gains in the year the loss happened, or the prior year.
If your business does cease to trade, losses in the twelve months before ceasing can be carried back up to three years.
Losses can also be carried forward against future trading profits.

If, for example, a business incurring losses of £70,000 in 2009 after several successful years, that loss could be carried back to 2008 in full, or to 2008, 2007 or 2006 capped at £50,000. It can be offset in full against other income or gains (say on a second home) received in 2009.

There is also the option to carry forward against future trading losses. Which will depend on two things:

how desperate the business is for cash
which year has the highest tax rate (it might be 41 pence in the pound for losses, or take 30 pence to get the cash now).

It is also often forgotten that if you carry back a trading loss or use it against other income, you can ALSO use it against future profits for Class 4 National Insurance purposes. A £20,000 loss could mean up to £1,600 off class 4 NI payments in the following period. Something definitely worth having!

Now on to companies

You can get a tax refund by carrying back tax losses to the previous period's trading profits.
You can take £50,000 of losses back up to three years this is a temporary measure with strict time limits.
You can offset losses against other types of income and gains in the year the loss happened.
If your company does cease to trade, losses in the twelve months before ceasing can be carried back up to three years.
Losses can also be carried forward against future trading profits.
Rental losses are very flexible.

Time limits apply for the claim and you may even want to change your year end to access refunds earlier or maximise tax refunds.

If your trading company, or a company you invest in has gone into liquidation you could also be eligible for a tax refund, again make sure you talk to your accountant.

What about groups?

If you are operating a group of companies and are part of a qualifying group, losses can be shared between companies with few restrictions. If you have a profitable trade in one company and a loss in another there are tax options to consider so that neither company pays any Corporation Tax.

Strategically planning and utilising losses efficiently can generate some much needed cash flow for your business, and restrict your outgoings. Maximise all losses. Cash is king in these troubled times, so if a refund is available make sure you are getting the best result.

If you are struggling to pay on time, use HM Revenue & Custom's Business Payment Support Service.

About the author

Duncan Montgomery is a tax partner at Whittingham Ridell, Shrewsbury, Shropshire and a member of the UK200Group tax panel. UK200Group is the leading mutual professional association in the UK with over 110 UK quality assured independent accountancy firms and lawyer firms, as well as 50 International Associate member firms around the globe. For more information email admin@uk200group.co.uk or visit www.uk200group.co.uk.

UK200Group is an association of separate and independently owned and managed accountancy and lawyer firms. UK200Group does not provide client services and it does not accept responsibility or liability for the acts or omissions of its members. Likewise, the members of UK200Group are separate and independent legal entities, and as such each has no responsibility or liability for the acts or omissions of other members.

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