At Budget 2021 the Chancellor announced additional measures to relieve trading losses for sole traders and partnerships.

Under existing rules, Trading losses can be offset, in the current year, or previous tax year, against other income.

Under the new proposal:

  • Trading losses arising in the years to 5 April 2021 and 2022 can be carried back three years against profits of the same trade.
  • Losses are offset against trading profits of most recent years first.
  • The limit on losses carried back in this way is £2m for 2020/21, the same limit applies for 2021/22.
  • This new relief will also apply to Class 4 National Insurance Contributions.
  • The relief will apply to trading losses from a Furnished Holiday Letting business.
  • Relief is not available for uncommercial trades.
  • Claims can be made in a tax return.
  • Where a claim affects more than one tax year, a standalone claim can be made.
  • The time limit for making a claim in respect of the 2021 tax year is 31 January 2023, and 31 January 2024 for a claim in the 2022 tax year.

HMRC have provided the following examples:

An individual trader’s profits, losses and other income are:

2017 to 2018: Trade Profit £1,200,000,  Employment Income £50,000
2018 to 2019: Trade Profit £1,200,000, Employment Income £50,000
2019 to 2020: Trade Profit £500,000, Employment Income £50,000
2020 to 2021: Trade Loss £3,000,000, Employment Income £50,000

The trader makes a claim under section 64 of ITA07 to set the 2020 to 2021 loss against general income of both the year of loss (£50,000) and the previous year 2019 to 2020 (£550,000).

The remaining part of the 2020 to 2021 loss, up to a maximum of £2,000,000, is available to carry back to set against trading profits of 2018 to 2019 and 2017 to 2018 (in that order), and the trader makes a claim under the new provision.

Loss set against

  • £50,000 general income of 2020 to 2021.
  • £550,000 general income of 2019 to 2020.
  • £1,200,000 trade profit of 2018 to 2019.
  • £800,000 trade profit of 2017 to 2018 (cap applied).

£400,000 of the loss remains available to be claimed to carry forward and set against trade profits in future years.

Useful guides on this topic

Budget 2021: Subscriber guide
A detailed guide with links to more detail on all the key topics for SMEs and their owners.

Losses, trade losses and sideways relief
How can trade losses be utilised? What are the restrictions?

Losses (sideways): Restriction for uncommercial trades
What are the restrictions to sideways loss relief? When do they apply? What is an uncommercial trade?

Furnished Holiday Letting
What is Furnished Holiday Letting? How do you qualify for Furnished Holiday Letting? What are the rules for Furnished Holiday Letting?

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