ACCA F6 FA09 Study Text 2010

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Chapter 9: Trading losses of an unincorporated business

Step 2: The loss relief available, the tax year(s) to which the loss(es) relate and

the options available for loss relief

If an overall net loss is calculated in Step 1, this net loss is the amount available for

s64 relief. The tax year of the loss is the tax year in which the net loss occurs and the

trading assessment is £Nil.

Step 3: Prepare the income tax computations and keep a record of the losses

In answering an examination question, read the requirements carefully. Some

questions require losses to be claimed in a specified way; other questions require

losses to be utilised in the most tax-efficient manner. Tax planning is considered

later.

Example

Debbie started to trade on 1 November 2008 and decided to prepare her accounts to

30 September each year. Her results for the first two years are as follows:

Period ended

Adjusted profit/(loss)

after capital

allowances

30 September 2009 (22,000)

30 September 2010

60,000

Required

Calculate Debbie’s trading income assessments for the first three tax years. State the

amount of loss relief available under s64, and identify the years against which a

claim can be made.

Answer

Step 1: Trading income assessments for each tax year

(a) Work out the first tax year of trading:

Trading starts on 1 November 2008 = In tax year 2008/09 = First tax year

i.e. 1 November 2008 to 5 April 2009

(b) Make the second tax year decision:

Second tax year = 2009/10. Ask two questions:

Are there accounts which end in the

tax year?

Yes = period ended 30 September

2009

Are these accounts 12 months in

length?

No = less than 12 months

Decision Assess the first 12 months’

profit/(loss)

i.e. 1 October 2009 to 30 September 2010

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Summarise and calculate the trading income assessments

Tax

year

Basis period

Workings (nearest month)

Assessable

trading income

£ £

2008/09

Actual:

1.11.2008 – 5.4.2009

5/11 × £22,000 loss

= Net loss

(10,000)

Nil

2009/10

First 12 months:

11 months ended

30.9.2009

Loss in the period (22,000)

Loss already used in

2008/09 calculation

10,000

(12,000)

1 month 30.9.2010 Profit (1/12 × £60,000) 5,000

Net loss (7,000) Nil

2010/11

12 months ending in third year

Year ended 30.9.2010

60,000

Step 2: Work out the loss relief available if s64 relief is claimed

For the £22,000 adjusted loss after capital allowances arising in the 11 months’

accounting period ended 30 September 2010, the following loss relief is available:

Tax year of loss Amount of

loss

Loss relief available

2008/09 10,000 s64 relief available against total income in:

(1) 2008/09 and/or

(2) 2007/08

2009/10

7,000 s64 relief available against total income in:

(1) 2009/10 and/or

(2) 2008/09

Remaining loss 5,000 Used in calculating the 2009/10 assessment

22,000



 Note

 The 2009/10 assessment is nil. However, as £5,000 of profit was allocated to that

year,£5,000ofloss musthavebeenused inorder toreduce the£5,000profitto nil.

Thisisreferredtoasrelievinglossesinaggregation.

4.3 Special opening year loss relief claim under s72 ITA 2007

Relief is available under s72 if the normal opening year rules result in a net loss

arising in one or more of the first four tax years of trading.

Chapter 9: Trading losses of an unincorporated business

Calculating the amount of loss relief available under s72 is the same as for s64.

However, s72 gives relief for the loss in different tax years from those used under

s64.

For a trading loss incurred in one of the first four tax years, an individual can make

a claim to carry back the loss against his total income in the three preceding tax

years on a first-in-first-out (FIFO) basis.

When setting off the trading loss under s72, the following rules apply:

Rule: Explanation:

Set off against total

income

 Total income is all other income after deducting

allowable interest payments, but before the PA.

Strict order of set off  Relief is on a FIFO basis (i.e. the earliest year must

be relieved first and then the next year and the

year after that, in date order).

All three years must be

relieved, if possible

 A s72 claim is a single claim that applies to all

three years.

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

made, the total income of all three years must be

relieved as much as possible.

 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 each tax year

 It is an all or nothing relief.

 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.

A claim must be made for s72 relief within the same time limit as s64, i.e. 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).

Example

The facts are the same as the previous example involving Debbie.

Required

State the amount of loss relief available under s72 and the years against which a

claim can be made under s72.

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Answer

The trading income assessments are calculated in the same way as in the previous

answer.

If s72 relief is claimed

For the £22,000 adjusted loss after capital allowances arising in the 11 months’

accounting period ended 30 September 2009 the following loss relief is available:

Tax year of loss Amount of loss Loss relief available

2008/09 10,000 s72 relief available against total income in:

(1) 2005/06 and then

(2) 2006/07 and then

(3) 2007/08

- in that strict order

- as much as possible each year

2009/10 7,000 s72 relief available against total income in:

(1) 2006/07and then

(2) 2007/08 and then

(3) 2008/09

- in that strict order

- as much as possible each year

Remaining loss 5,000 Used in calculating the 2009/10

assessment

22,000

Chapter 9: Trading losses of an unincorporated business

Loss relief in the closing years

 The rules of s89 ITA 2007: closing year loss relief

 The procedure for closing year loss relief

 The carry forward of losses following incorporation

5 Loss relief in the closing years

5.1 The rules of s89 ITA 2007: closing year loss relief

Relief is available under s89 if a trading loss is incurred in the last twelve months

of trading. An individual can make a claim to set off the loss:

 in the last tax year and then

 carry back the loss against his trading income in the three preceding tax years

on a last-in-first-out (LIFO) basis.

When setting off the trading loss the following rules apply:

Rule: Explanation:

Set off against trading

income

 The loss can only be set against trading income.

Not against other types of income or gains.

Strict order of set-off  Relief is on a LIFO basis. The most recent year must

be relieved first and then the previous year, and so

on, in reverse date order.

All three years must be

relieved, if possible

 A s89 claim involves a single claim which applies to

all three years.

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

made, as much as possible of the profits of all three

years must be relieved.

 The individual will want to claim as much relief as

possible, because the business has ceased and there

is no carry forward relief available.

Must set off as much as

possible in each tax year

 It is an all or nothing relief.

 The maximum amount must be deducted from

trading income.

A claim must be made for s89 relief within four years of the end of the tax year in

which the cessation occurs.

Paper F6 (UK): Taxation FA2009

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Calculating the available loss

The amount of loss that can be relieved in this way is the loss of the last twelve

months trading. The available loss is calculated in three parts as follows:

1. Overlap profits not yet relieved X

Last tax year

2. Trading loss in the last tax year

(i.e. from 6 April before cessation to the date of cessation)

(Ignore if a profit)

12 months before cessation to 5 April before cessation

(the length of this period is y)

3. Actual trading loss in period y

(Ignore if a profit)

Terminal loss of the last 12 months trading X

Note that a loss can only be relieved once. Therefore the terminal loss cannot

include a loss that has been relieved under another provision. In other words, losses

used in a s64 claim or a s261B claim, if any, must be excluded.

5.2 The procedure for closing year loss relief

The procedure to adopt for dealing with a closing year loss is as follows:

Step 1: Identify the last tax year. Work out the trading income assessments for

the final year and preceding three tax years

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

the normal way. However, where an overall net loss arises from applying the rules

(i.e. the calculations give a negative figure), the trading income assessment for that

tax year is £Nil.

Step 2: Set up the income tax loss computations in columnar format, for all

the tax years affected

There should be a separate column for each tax year. Insert all the known figures

into each column, i.e. the trading income assessments from Step 1, other income,

allowable interest payments and personal allowances.

Step 3: Work out the amount of loss relief available, the tax year(s) to which

the loss(es) relate, and the options available

If an overall net loss is calculated in Step 1, this net loss is the amount available for

s64 relief. Consideration should be given as to whether a s64 and a s261B claim are

desirable.

For a decision, look at the income tax computations set up in Step 2 and determine

whether a higher rate of relief is obtained by making a s64 and possibly a s261B

claim, rather than carrying back the loss under s89.

Chapter 9: Trading losses of an unincorporated business

The terminal loss then needs to be calculated, taking account of s64 and s261B

claims to be made, if any. This calculation should be done in a separate working.

Step 4: Complete the income tax computations

Relieve the terminal loss on a LIFO basis, and keep a record of the utilisation of

losses for all tax years involved.

Example

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

30 September 2009 she ceased to trade. Her results for the last years are as follows:

Adjusted profit / (loss)

after capital allowances

Year ended 31 January 2007 42,000

Year ended 31 January 2008 14,000

Year ended 31 January 2009 12,000

Eight months ended 30 September 2009 (8,000)

Eva received £800 fixed interest on a building society account on 31 December each

year and paid allowable interest of £1,200 (gross) on 30 June each year. She also

received a dividend of £2,700 from a UK company on 14 May 2008.

Her overlap profits not yet relieved total £32,000.

Required

Calculate Eva’s taxable income for all tax years affected assuming losses are carried

back under s89 and no other loss relief claim is made. Assume the 2009/10 personal

allowance applies in all years.

Answer

Step 1: Identify the last tax year and work out the trading income assessments for

this and the preceding three tax years

Cessation of trade: 30 September 2009 = In tax year 2009/10 = Last tax year.

Penultimate year: 2008/09 = CYB basis of assessment = Year ended 31 January 2009.

Last tax year assessment – 2009/10 £

Profits not yet assessed (1.2.2009 – 30.9.2009)

Period ended 30 September 2009 - loss (8,000)

Minus: Overlap relief (32,000)

–––––––––––––––––––––––––––––––––

–

Net loss = Loss relief available under s64 (40,000)

–––––––––––––––––––––––––––––––––

–

Final tax year assessment for 2009/10 Nil

–––––––––––––––––––––––––––––––––

–

Paper F6 (UK): Taxation FA2009

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Summary of assessments:

Tax year Basis of assessment Basis period £

2006/07 CYB Year ended 31 January 2007 42,000

2007/08 CYB Year ended 31 January 2008 14,000

2008/09 CYB Year ended 31 January 2009 12,000

2009/10 as above

Nil

Step 2: Set up the income tax loss computations in columnar format, for all the tax

years affected

Set out the income tax computations in columnar form, as follows, inserting all

known figures. Note that at this stage, the terminal loss figures and therefore the

final result are not known.

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

£ £ £ £

Trading income 42,000 14,000 12,000 Nil

Minus: s89 terminal loss relief ( ? ) ( ? ) ( ? ) Nil

–

––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

–––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

Nil

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

Dividend income (× 100/90) Nil Nil 3,000 Nil

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

–––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

1,000

Minus: Allowable interest payments (1,200) (1,200) (1,200) (1,200)

–

–––––

–

––––––––––––––––––––––

–

–––

–

–––––

–

––––––––––––––––––––––––––

–

–––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

Total income

Nil

Minus: Personal allowance (6,475) (6,475) (6,475) Wasted

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––

–

–––––––––

–

–––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

Taxable income

Nil

–––––––––––––––––––––––––––––––––

–

The final year (2009/10) can be completed:

 there will be no s64 claim as there is no total income

 there is £200 of unrelieved interest in the last year and

 the personal allowance is wasted.

Step 3: Work out the amount of loss relief available and the tax year(s) to which

the loss(es) relate

£ £

1. Overlap profits not yet relieved

 32,000

Last tax year



Actual trading loss in last tax year



Period 6.4.2009 to 30.9.2009: (6/8 × £8,000 Loss) = £6,000 loss

6,000

12 months before cessation to 5 April before cessation

1.10.2008 to 5.4.2009 = 6 months



Actual trading loss in this 6 month period



Period 1.10.2008 to 31.1.2009: (4/12 × £12,000) profit

4,000

Period 1.2.2009 to 5.4.2009: (2/8 × £8,000 loss) loss

(2,000)

–––––––––––––––––––––––––––––

Net profit for the period

2,000

–––––––––––––––––––––––––––––

– Ignore profit in loss calculation

 Nil



–––––––––––––––––––––––––––

–

Terminal loss of the last 12 months trading

 38,000



–––––––––––––––––––––––––––

–

Chapter 9: Trading losses of an unincorporated business

Step 4: Complete the income tax computations

Complete the income tax computations, carrying back the terminal loss on a LIFO

basis. The loss should be deducted from trading income.

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

£ £ £ £

Trading income 42,000 14,000 12,000 Nil

Minus: s89 terminal loss relief (12,000) (14,000) (12,000) Nil

–

––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

30,000 Nil Nil Nil

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

Dividend income (× 100/90) Nil Nil 3,000 Nil

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

31,000 1,000 4,000 1,000

Minus: Allowable interest payments

(1,200) (1,200) (1,200) (1,200)

–

–––––

–

–––––––––

–

––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

Total income 29,800 Nil 2,800 Nil

Minus: Personal allowance

(6,475) wasted (2,800) wasted

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

–––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

Taxable income 23,325 Nil Nil Nil

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

––––––––––––––––––––––

–

––––––––––

Working: Record of trading losses

Terminal loss

38,000

Set off under s89

- in tax year of loss 2009/10 Nil

- carry back to 2008/09

(12,000)

- carry back to 2007/08 (14,000)

- carry back to 2006/07 (12,000)

–

–––––

–

––––––––––––

–

–––––––––––––

Nil

–

–––––

–

––––––––––––––––––––––––––

5.3 The carry forward of losses following incorporation

When a business ceases to trade, any trading losses are relieved in the tax year of the

loss and/or the preceding year under s64 if possible. Terminal loss relief is then

available to carry back losses to the preceding three tax years. Normally, if there are

any unrelieved trading losses after a terminal loss claim, they are lost.

However, where a business ceases to trade because it incorporates and certain

conditions are satisfied, unrelieved trading losses can be carried forward

indefinitely under s86 ITA 2007.

The conditions which must be satisfied are as follows:

 the business is ceasing because it is being transferred as a going concern to a

company

 the consideration is wholly or mainly in the form of shares. (‘Mainly’ in this

context is taken to mean at least 80% of the consideration is in the form of

shares.)

 the company continues to carry on the business of the previous owner

Paper F6 (UK): Taxation FA2009

 the previous owner of the business retains the shares throughout the period in

which loss relief is being claimed.

The rules for the relief are as follows:

Set off against: Explanation:

The first available

 The trading loss must be set off in the next tax year if

possible.

 An individual can not choose to miss out a tax year,

for example to obtain a higher rate of tax relief.

Income derived from

the company

 The set-off is against any employment income,

interest and dividend income received by the

previous owner from the company.

 The set off can be made against the income in any

order. However, it will usually produce most benefit

if set off against earned income first, followed by

savings income and finally dividends.

 The trading losses cannot be set off against other

income or gains.

Using as much as

possible of the trading

loss

 In each future tax year, the maximum amount of

trading loss must be set off until relief has been given

for the total trading loss.

Note that s86 gives loss relief to the previous owner of the business against his

personal income. The losses cannot be utilised by the company against its profits

chargeable to corporation tax.