If you are running a successful business and making tons of profit, this does not mean that you are far away from seeing a bad day. A businessman always takes into account the risk of losing his money. But the bigger question is what happens next for a businessman, supposedly if he has suffered a significant loss. If that happens, don’t you ever wonder how to claim a tax refund against losses?
Tax and liabilities are probably the first shockwaves that hit a sinking business. Successful businessmen always take contingencies into account in such situations. So, if you are starting a business just now, know that having an exit strategy is as important as starting a business. The same is the case with your tax refund strategy. It depends on the legal positioning of your business and other means of income. Our chartered accountants in London help you claim a tax refund against losses.
Calculate Your Business Loss
Unfortunately, if you managed to get this far, then it means that you have probably lost most of your business-related income and profits. Then you have to start the irksome but very important step of calculating your losses.
The method of calculation is very simple. It just needs the addition of your income to your tax returns; then you have to subtract the expenses from your tax returns. If the subtracted business expenses are greater than the income, then you’re at a loss.
Trading losses and how you can claim them
Self-employment always poses a risk of trading losses. If your company is making a loss from trading, the sale or disposal of a capital asset, or property income, then you can get some relief from corporation tax.
Assessing your trading losses is not a very long and hard process. It involves the same process as the calculation of profits, but now you are calculating your losses instead of your gains.
What you can do in case of back losses
In the case of back losses, some additional information may be required for self-assessment. You just need to fill in the extra information regarding the earlier year and the amount of loss to be subtracted while calculating the net income of the early years.
How to sign up for making tax digital vat
You have to sign up first digital VAT. To make an account, you’ll need an email, government user id and password and VAT registration number. Other details will depend on your business as you’ll need a Unique Taxpayer Reference and company registration number; NIC if you are a sole trader.
How to claim a trading loss
Here is the process you need to go through to claim trading losses with HMRC:
It forms part of the company’s Tax Return. If the claim covers the company’s latest accounting period then you have to open form CT600 and enter ‘0’ in the box 155. After that, you just have to put your amount of loss in the box 780 of the form.
You have to follow the same procedure for the losses of later years and this is how to claim a tax refund against losses.
Losses incurred by the company
For future accounting quarters, trading losses can be offset against profits from the same trade in future. But here’s the good part, for this particular step you don’t need to make a claim. Upon filing company tax returns the claim will be made automatically. To carry along the company losses you may have to wait a bit for a refund, just until your company starts making a profit.
A useful tip for you!
Instead of carrying your losses along, you can file a claim for the loss to be offset against your profits for the preceding one year. However, this will not work for a startup business.
What can you do with the capital allowance?
Capital allowance plays a vital role in calculating your losses, that’s why it is so important to consider while carrying the whole refund process. To be on a safe side, it is best that you claim the full capital allowance to expand and broaden the tax losses. But another option is to carry along the bigger assets to minimize the taxes in the future time frame.
What if you want to claim previous two year’s losses
There are some basic questions that would probably arise in your mind here. For example what if you have made a business loss for the period of 2019 to 2020. And suppose if you were earning an income in the form of your salary for both 2019/2020 and 2018/2019. But, can you set off the losses against both of them?
The simple and very straightforward answer is yes. You can claim losses for both previous years. But first you have to do one thing. If you want to claim the relief for both above mentioned years you have to prioritize. Just choose which year’s losses you want to claim first.
This simply means that you are claiming for both years; that way you are also wasting personal allowances. In the case of capital gains, you may also bring forward your claim against those capital gains.
What about your early years losses?
If you face a loss in your early four trade tax years they may be carried back. In that case, you can set them against the income for the previous three years.
Here’s an example for you
If you have incurred a loss in the year 2019/2020. Let’s just say it’s £20,000. You have to remember that those losses are incurred in your initial years. They will be carried back three years to 2016/2017. That will set against your total income of that particular year.
Suppose the income was £30,000. Now here’s the important part. If you are claiming the loss than this income will shrink to £10,000. That means the total payable tax for that year will be reexamined. Your tax will be converted into an overpaid tax and then the extra amount will be refunded.
Can you bring forward the future profits
So, we have talked about the losses, but enough about the losses and let’s jump into the optimistic side of the things and talk about the profits that you make.
Here’s another scenario for you. What if you have posted a loss of £10,000 in a previous year and now you are optimistic about making profit. So can you use that loss now?
HMRC has a very generous heart here. So why not? You can do it and the loss that you made will be set against your profits. If you have got any balance that is remaining, it will be shifted to the next year.
What if you have made a loss in final 12 moments
The final year would be the year starting from January 2019 to December 2019. Suppose you have posted a loss of £15,000. Consider this loss for the last nine months. If you have made a profit for the previous three months. The total amount of the loss will be taken to be £nil, which is called Terminal loss. Now the terminal loss will be £15,000.
Time Limits for making loss claims?
So, now that you have probably digested the technical conditions of the tax claim, you would be wondering about time limits on how to claim a tax refund against losses. So yes, HMRC strictly follows time limits in these cases.
You have to watch your clock if you want to claim your tax. If you have made a loss for current or previous year, you have to claim within one year starting from January 31. This is after the end of your bad year, which posted loss. So if you have made a loss for the tax year 2019/2020, you have to make your claim by 31 January 2022.
Your loss will be carried forward to the later years. For this you must claim within four years from the end of the bad year. So if you have made a loss for the tax year 2019/2020, you have to make your claim by 5 April 2024.
Here’s what happens in the case of new business losses.
In the case of losses in the initial four years of a trade you need to claim them within one year time. That starts from January 31 after your loss making year ends. For example, if you have posted a loss for the 2019/2020 tax year, you must claim it by January 2022.
Tax credits and universal credits
In many circumstances, getting a tax relief for the losses you make will be very different. Particularly from the tax credit rules.
Carry back losses
In case of a real tax, carrying back the losses would be better. This way you can get your tax refund with respect to the preceding year. For tax credits, one thing you should bear in mind that reopening of the claims for the previous year is not a possibility. Carry-back of losses for tax credits will not work.
Universal credit
Taking relief for the cases involving universal credit work a bit differently because it incorporates your monthly income. If you are earning monthly and your bank account has a different story to tell in terms of losses, then your losses will be considered as having £nil balance in that same month. The loss may be subjected to a minimum income floor (MIF).
The good part!
Now here’s the good part. HMRC had introduced new rules in 2018, new rules allowed some flexibility as well. According to the new rules of 2018, you can carry forward losses, but in between assessment periods. You don’t have to worry much. Your previous losses will be covered because you can bring them forward.
If you are lost in between lines and struggling to digest the minor details, it means that you need professional help to help you with how to claim a tax refund against losses. It is better if you leave the matter to the experts who can do all the process for you. There are multiple experts working in London. But look for the one you can afford easily. We suggest consulting these cheap accountants in London, they will give you customized consultation and provide you with expert opinion.
