UK Fact-File Part 2:
Individual Business Domestic Taxation

2.9 UK Business Losses

The tax treatment of business losses

A self-employed sole trader who makes a trading loss in any tax year may carry forward the loss to future tax years and set the loss against future profits (from the same trade or activity) to reduce the tax bill. The loss can be set against future years’ profits until it has been used up, subject to certain restrictions.

Carrying forward losses might affect an individual’s personal tax allowances, however, as losses are taken into account before applying personal allowances. A sole trader (or partnership participant) may opt to set a loss against the previous three tax years, provided that the loss is incurred within the first four years of trading.

A company is permitted to carry forward trading losses to offset against future profits, provided that the future profits are generated from the same business activity (eg an architect’s business). Any changes to the structure of the business may mean that this relief is not allowed, including the injection of capital by a third party.

Losses may be offset by companies against profits of the previous year; this was extended to three years, initially for the 2008/09 tax year only, and was subsequently extended to cover losses of up to GBP50,000, for accounting periods between November 2008 and November 2009.

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