ACCA F6 FA09 Study Text 2010

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Chapter 9: Trading losses of an unincorporated business

Example

Anne has traded for many years and prepares her accounts to 31 July each year. She

has supplied the following information:

Year ended 31 July 2007 2008 2009

£ £ £

Trading profit / (loss) (12,000) 8,000 45,500

Bank interest received 2,000 3,000 1,800

Dividends received from a UK company 540 630 900

Required

Calculate the taxable income for each tax year assuming losses are carried forward,

and calculate the unrelieved loss, if any, at 6 April 2010. Assume the 2009/10

personal allowance applies in each year.

Answer

Step 1

Apply the basis of assessment rules to determine the trading income assessments. A

nil assessment arises in the tax year in which the loss-making accounts end. Here

the loss-making accounts end on 31 July 2007, which is in 2007/08.

Year ended

Basis of assessment

Tax year Trading income

assessment

31 July 2007

CYB 2007/08 Nil

31 July 2008 CYB 2008/09 £8,000

31 July 2009 CYB 2009/10 £45,500

Step 2

Prepare the income tax computations and working of trading losses for each tax

year affected.

Anne: Income tax computations 2007/08 2008/09 2009/10

£ £ £

Trading income Nil 8,000 45,500

Minus: s83 trading losses b/f Nil (8,000) (4,000)

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Nil Nil 41,500

Bank interest (× 100/80) 2,500 3,750 2,250

Dividend income (× 100/90) 600 700 1,000

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Total income 3,100 4,450 44,750

PA (part wasted in 2007/08 and 2008/09) (3,100) (4,450) (6,475)

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Taxable income Nil Nil 38,275

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Paper F6 (UK): Taxation FA2009

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Working: Record of trading losses 2007/08 2008/09 2009/10

£ £ £

Unrelieved trading loss b/f 12,000 12,000 4,000

Set-off under s83 0 (8,000) (4,000)

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Trading loss c/f under s83 12,000 4,000 0

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There is no loss left to carry forward at 6 April 2010.

Notes

(1) Losses brought forward can only be set against trading profits, not other

income. The maximum amount possible must be deducted each year.

(2) A better rate of tax saving would be achieved if the loss could be set off in

2009/10. However, losses brought forward must be set against the first

available future trading profits (i.e. 2008/09). It is not possible to skip a year.

(3) Unrelieved personal allowances are lost. Loss relief may therefore result in the

wastage of personal allowances.

(4) It is not possible to make a partial claim in 2008/09 to maximise the use of

personal allowances and save more loss for 2009/10. In any tax year the loss to

be relieved is the lower of:

− the loss available, and

− the trading profit of the tax year.

(5) It may be possible to avoid the wastage of personal allowances by not

claiming the maximum capital allowances in the accounting period. Tax

planning issues are considered later.

Chapter 9: Trading losses of an unincorporated business

Relief against total income

 The rules of s64 ITA 2007

 Proforma income tax loss relief computation

 Additional relief for trading losses incurred in 2009/10

3 Relief against total income

3.1 The rules of s64 ITA 2007

The objective of s64 loss relief is to allow an individual relief for a trading loss

immediately the loss is incurred, rather than waiting to obtain the relief in the future

years under s83.

An individual can make a claim to set off losses against his total income:

 in the tax year of the loss, and/or

 in the preceding tax year.

In effect, this means that the individual can make a current year and carry back

claim.

The basic rule allows a s64 claim to be made:

 in both years in any order,

 in neither year, or

 in either year in isolation.

An individual therefore has four options under s64 as follows:

(1) Set off in the current year only (i.e. the year of the loss).

(2) Carry back and set off in the preceding year only.

(3) Set off in the current year first, then carry back and set off in the preceding

year.

(4) Carry back and set off in the preceding year first, then set off in the current

year.

Note also that a s64 claim is optional; therefore a fifth option is available:

(5) Make no specific loss relief claim and the trading losses will be automatically

carried forward under s83, as explained earlier.

When setting off the trading loss in the current or preceding year, the following

rules apply:

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Rule: Explanation:

Set off against total

income

 Total income is all other income after deducting

allowable interest payments, but before the PA.

Must set off as much as

possible in the tax year

 It is an all or nothing relief.

 The claim is optional. However, if the claim is

made, the maximum amount must be deducted

from the total income.

 Loss relief may reduce the total income to £Nil, so

that the relief for personal allowances is lost.

 The personal allowances cannot be carried forward,

or carried back: they are wasted/lost.

A claim must be made for s64 relief within one year of the 31 January following the

end of the tax year of the loss (i.e. the 31 January immediately prior to the second

anniversary of the end of the tax year of the loss).

If an individual claims under s64, any trading losses left unrelieved are

automatically carried forward and set off under the rules of s83, unless the

additional relief for losses incurred in 2009/10 is claimed or a claim is made to

extend the use of s64 to match against capital gains.

This extension claim is sometimes referred to as a s261B claim, as the relief is

contained in section 261B of the Taxation of Chargeable Gains Act 1992. (The claim

is considered in a later chapter.)

3.2 Proforma income tax loss relief computation

A proforma for an income tax loss relief computation is set out below. This

proforma assumes that the trading loss arises in the accounting period that forms

the basis of the 2009/10 tax year.

Income tax computations 2008/09

2009/10 2010/11

Trading income X

Nil

Minus: s83 trading losses b/f -

(X)

Nil

Other income X

Minus: Allowable interest payments (X)

(X)

Total income before loss relief X

Minus: s64 claim

- current year claim

(X)

- carry back claim (X)

Taxable income -

Chapter 9: Trading losses of an unincorporated business

Working: Record of trading losses

2009/10 2010/11

£ £

Trading loss b/f

Set off under s83

(X)

Trading loss in the tax year

Set off under s64

- in year of loss (i.e. 2009/10)

(X)

- in preceding year (i.e. 2008/09)

(X)

Trading loss c/f under s83

Example

Chris prepares his accounts to 31 December each year and has supplied the

following information:

Year ended 31 December 2008 2009 2010

£ £ £

Trading profit / (loss) 35,500 (32,000) 16,250

Building society interest 1,600 640 880

Dividends received from a UK company 270 63 810

Allowable interest paid 500 500 500

Required

Calculate the taxable income for each tax year assuming losses are relieved as soon

as possible, and calculate the unrelieved loss available to carry forward, if any, at 6

April 2011. Assume the 2009/10 personal allowance applies in each year.

Answer

Trading income assessments

Year ended

Basis of

assessment

Tax year Trading income

assessment

31 December 2008

CYB 2008/09 £35,500

31 December 2009 CYB 2009/10 Nil

31 December 2010 CYB 2010/11 £16,250

2009/10 = tax year of the loss

Paper F6 (UK): Taxation FA2009

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Chris: Income tax computations 2008/09 2009/10 2010/11

£ £ £

Trading income 35,500 Nil 16,250

Building society interest (× 100/80) 2,000 800 1,100

Dividend income (× 100/90) 300 70 900

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37,800 870 18,250

Minus: Allowable interest payments (500) (500) (500)

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Total income before loss relief 37,300 370 17,750

Minus s64 loss relief (32,000) (Nil) (Nil)

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Total income after loss relief 5,300 370 17,750

PA (5,300) (370) (6,475)

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Taxable income Nil Nil 11,275

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(W) Record of trading loss 2009/10

Trading loss in tax year 32,000

s64 loss relief claimed in 2008/09 (32,000)

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Trading loss c/f Nil

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There is no loss left to carry forward at 6 April 2011.

Note on this example

The requirement in this example was that relief should be set off as soon as possible.

This means that a s64 claim is to be made in the preceding year and then the current

year, if possible.

If the requirement had been for losses to be set off in the most tax-efficient manner,

the answer would have been the same in this example. This is because:

 the total income in the current year (i.e. 2009/10) is covered by the PA

 carrying forward the loss will waste more personal allowances and save tax at a

lower rate. In addition, the individual has to wait for the tax relief for his loss.

Therefore, even though some personal allowances are lost with a carry back claim,

the relief is obtained as soon as possible and, in this example, the claim saves the

individual the most amount of tax. It may also be possible to avoid the wastage of

personal allowances by not claiming full capital allowances.

3.3 Additional relief for trading losses incurred in 2009/10

Finance Act 2009 has introduced a temporary extension to the trading loss rules.

This extension applies to losses incurred in 2008/09 and 2009/10. However, the

examiner has advised that any question involving additional relief will be confined

to losses incurred in 2009/10.

Chapter 9: Trading losses of an unincorporated business

The additional relief allows losses to be carried back and set against trading profits

of the three preceding tax years. This carry back is on a last-in-first-out (LIFO) basis.

It is important to note that the additional relief can only be claimed if the taxpayer

makes a claim under s64 first, unless their total income for both the year of the loss

and the preceding year is nil. (However, the s64 claim only needs to be made against

one of the two possible years, not both.)

There is a limit of £50,000 on the total relief that can be claimed against the two

earliest years of set off. (There is, however, no restriction on the amount that can be

claimed against 2008/09 income.)

The rules relating to the extended form of loss relief can be summarised as follows:

Rule: Explanation:

Losses incurred in

2009/10

Set off against total

income first

Relief against trading

profits

Relief on LIFO basis

 Losses are allocated to tax years in the same way as

profits.

 Before the additional relief may be claimed a

normal s64 claim must be made against total

income of 2008/09 and/or 2009/10, unless the total

income of both years is nil.

 Although s64 relief is set against total income, the

additional relief can only be set against trading

profits.

 The set off is against profits of the most recent years

first, i.e. 2008/09, then 2007/08 and finally 2006/07.

 It is not possible to relieve in one or two years only,

unless there is insufficient loss to relieve all three

years.

Must set off as much as

possible in the tax year

Relief restricted to £50,000

 It is an all or nothing relief.

 The claim is optional. However, if the claim is

made, the maximum amount must be deducted

from the total income.

 The restriction applies only to 2007/08 and

2006/07.

 The additional relief for those two tax years is

limited to a total of £50,000.

Example

Eric has been trading for many years preparing accounts to 31 January each year.

His results for the last few years are as follows:

Paper F6 (UK): Taxation FA2009

182 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

Adjusted profit / (loss)

after capital allowances

Year ended 31 January 2007 45,000

Year ended 31 January 2008 15,000

Year ended 31 January 2009 8,000

Year ended 31 January 2010 (68,000)

Eric receives rental income of £6,000 each year.

Required

Calculate Eric’s taxable income for all tax years affected assuming he claims loss

relief in the most beneficial way. Assume the 2009/10 personal allowance applies in

all years.

Answer

Step 1: Apply the basis of assessment rules to determine the trading income

assessments.

Tax year Basis of assessment Basis period £

2006/07 CYB Year ended 31 January 2007 45,000

2007/08 CYB Year ended 31 January 2008 15,000

2008/09 CYB Year ended 31 January 2009 8,000

2009/10 CYB Year ended 31 January 2010 Nil

Step 2: Slot the figures of income into the income tax computation and make a s64

set off in either 2008/09 or 2009/10.

Income tax computations 2006/07 2007/08 2008/09 2009/10

£ £ £ £

Trading income 45,000 15,000 8,000 Nil

Minus: additional loss relief (?) (?)

Nil

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8,000 Nil

Property income 6,000 6,000 6,000 6,000

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14,000 6,000

Minus: s64 loss relief - - (14,000) Nil

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Total income 16,000 6,000 Nil 6,000

Minus: Personal allowance (6,475) (6,475) wasted (6,000)

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Taxable income

Nil Nil

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Chapter 9: Trading losses of an unincorporated business

Step 3: Carry the remainder of the loss back against trading income on a LIFO

basis, being careful to ensure that no more than £50,000 is carried back in total

against 2006/07 and 2007/08.

Income tax computations 2006/07 2007/08 2008/09 2009/10

£ £ £ £

Trading income 45,000 15,000 8,000 Nil

Minus: additional loss relief (35,000) (15,000)

Nil

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10,000 Nil 8,000 Nil

Property income 6,000 6,000 6,000 6,000

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16,000 6,000 14,000 6,000

Minus: s64 loss relief

- - (14,000) -

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Total income 16,000 6,000 Nil 6,000

Minus: Personal allowance (6,475) (6,000) wasted (6,000)

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Taxable income 9,525 Nil Nil Nil

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Working: Record of trading losses

Loss

68,000

Set off under s64

- in 2008/09 (14,000)

- additional relief in 2007/08 (15,000)

- additional relief in 2006/07

(restricted to 50,000 – 15,000)

(35,000)

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Carried forward under s83 4,000

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Notes

In order to claim the additional relief, Eric must make a s64 claim in either 2008/09

or 2009/10. The above example assumes that the claim has been made in 2008/09

even though this results in the loss of his personal allowance for that year.

Eric could have chosen to make the s64 claim in 2009/10. However, this would have

resulted in the loss of his personal allowance for that year instead. The overall result

for the four years would have been the same.

Paper F6 (UK): Taxation FA2009

Loss relief in the opening years

 The s64 rules in the opening years

 The procedure for opening year loss relief

 Special opening year loss relief claim under s72 ITA 2007

4 Loss relief in the opening years

4.1 The s64 rules in the opening years

The rules of s64 in the opening years are exactly the same as the rules applying in

the ongoing years. However, there are three issues to consider when claiming s64

relief in the opening years:

 working out the trading income assessment in the opening years where a loss is

involved

 deciding the tax year of the loss, and

 calculating the amount of loss relief available under s64.

It is possible for one accounting period loss to give rise to two separate losses for s64

relief in different years.

Where consecutive losses arise, the losses should be dealt with in date order; first

loss first, then the second loss. If applicable, any current year loss set off takes

priority over losses carried back to that year.

4.2 The procedure for opening year loss relief

The procedure to adopt for dealing with an opening year loss is as follows:

Step 1: Trading income assessments for each tax year

The opening year basis of assessment rules are applied to both profits and losses in

the normal way. However, where an overall net loss arises (i.e. where the

calculations give a negative figure), the trading income assessment for that tax year

is £Nil.

Note that a loss may only be relieved once. There is no such thing as overlap losses.

It is not possible to obtain relief for an amount greater than the loss that is actually

incurred. Therefore, if a loss (or part of a loss) is brought into the calculation of an

assessment in one tax year, it cannot also be taken into account in the next tax year’s

calculation. (See the example below).