November questions and answers

Newsletter issue - November 2016.

Q. I have recently set up my own business after having been employed for many years. Although I am hopeful that I will eventually make a profit, I anticipate that I am likely to make a small loss in each of my first three years of trading. What is the best way for me to utilise these losses for tax purposes?

A. If a business is being carried on a commercial basis with a view to making a profit, it is generally possible to claim relief for a trading loss in one tax year against other taxable income (for example PAYE income or a pension) from the same year, or the one before. You will be free to decide which year to claim the losses against. You should note that HMRC will restrict loss relief if you carry on a trade but spend an average of less than ten hours a week on commercial activities.

Where a loss is incurred in any of the first four tax years of a new business, the loss can be carried back against total income of the three previous tax years, starting with the earliest year. Therefore, if you paid tax in any of the previous three years, you should be entitled to a repayment of tax, which may be especially welcome in those often difficult early years of trade. You must offset the maximum for each year - it is not permissible to offset just a proportion of the loss in order to spread the loss across three years to take advantage of beneficial tax rates. Again, relief will not be available unless you were trading on a commercial basis with a view to making a profit within a reasonable timescale. In practice, this requirement may be difficult to prove in the case of a new business and you may need a viable business plan to support a claim.

A cap on relief was introduced in April 2013, which applies to certain previously unlimited income tax reliefs that may be deducted from income. Trade loss relief against general income, and early trade losses relief, as outlined above, are two areas where this relatively new restriction will apply. The cap is set at £50,000 or 25% of income (calculated using a specific formula), whichever is greater.

Where a trader makes a loss in a year, but does not have any other income against which the loss can be set, he or she can carry it forward indefinitely and use it to reduce the first available profits of the same business in subsequent years.

A taxpayer can also set any losses arising from a business against any chargeable capital gains. The relief can be claimed for the tax year of the loss and/or the previous tax year. However, the trading loss first has to be used against any other income the taxpayer may have for the year of the claim (for example, against earnings from employment) in priority to any capital gains.

Q. My wife and I are both directors of a company and we are soon to relocate to another part of the country to set up a new branch. The existing branch will continue to be run by the two other company directors. Will we both be entitled to the £8,000 relocation expense exemption?

A. As long as you are both employees of the company in your own right, the exemption provisions in ITEPA 2003, s 287 should render you both eligible for the £8,000 exemption. Further information on relocation costs for tax purposes can be found on the GOV.UK website at https://www.gov.uk/expenses-and-benefits-relocation.

Q. I use the Flat Rate Scheme for VAT purposes. Can I claim back the VAT I have recently paid on some new equipment I have bought for the business?

A. If you use the Flat Rate Scheme, you can reclaim the VAT you have been charged on a single purchase of capital expenditure goods where the amount of the purchase, including VAT, is £2,000 or more. You reclaim the input tax suffered by making an entry in box 4 of your VAT return. If the costs cover more than one purchase and the total is less than £2,000, or the purchases relate to a supply of services, then no VAT is claimable, as this input tax is already taken into account in the calculation of your flat rate percentage. Further information on the Flat Rate Scheme for VAT can be found on the GOV.UK website at https://www.gov.uk/vat-flat-rate-scheme.

What our clients say about us...

  • "Paul has provided accountancy services to my company for 2 years now. I can recommend Paul very highly; his skills as an accountant are highly detailed and professional and he is always available to provide advice. One aspect of the way Paul works that I greatly appreciate is a preference to meet face to face when there is a detailed conversation to be had. I personally find this more productive and is a benefit of working with a small accountancy firm that you wouldn't get with the large faceless providers."

    ALISTAIR FAIRWEATHER - PROGRAMME & PROJECT MANAGER, DELIVERING/RESCUING I.T. 7 BUSINESS CHANGE WITH BUDGETS UPTO £50M INC SUPPIER MANAGEMENT

  • "I couldn't ask for more from Paul as an Accountant. Paul has been accountant to Work Relief Charity Recruitment for just over a year now and is proving an invaluable asset. Accurate, knowledgeable, flexible with an emphasis on service delivery, I would recommend Paul's services to any organisation looking for an accounts professional."

    Neil Price - Managing Director at Work Relief Charity Recruitment

  • "Paul was a referral from a family member when I started my business 2 years ago. As this was the first time I had ever run my own company I was totally clueless over the financial side of matters and was worried that I may have made mistakes in any of my accounting. I needn't have worried as after enaging Paul for a set monthly fee he was always there on the end of the phone for all sorts of questions I had and no matter how trivial they were Paul gave me all the information I required and more and did an excellent and painless job at the end of my first year! Couldn't ask for any better to be honest. Just two words - hire him!!!"

    Lee Westrap MBCS - Director - Bulldog IT Services

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Booth & Co  |   The Hermitage  |   15a Shenfield Road  |   Brentwood  |   Essex  |   CM15 8AG        Telephone: 01277 224666    |   Email: info@boothandco.co.uk