I have a sole trader with a loss of £12k. Business was set up in 2005 however over recent years the business has declined.
What is the best way to use the loss as the sole trader doesn't think there will be much of a profit next year so I'm thinking that carrying it forward is a waste. I have checked their tax records for the last 3 years, they paid £2162 11/12, £4322 12/13, £892 13/14.
How many years can a loss be used on previous tax years or would you advise something else?
You could carry the loss back 3 years and use it against 11/12 first.
Though remember you have to use it against all profits for that year before moving onto the next. You can't just use against profits to reduce taxable profits to the personal allowance level so as not to waste the personal allowance.
I have contacted HMRC on this and since found that when they previously filled in their tax return they stated they were using the Cash Basis and they stated the only other alternative is to carry the loss forward. Having checked with the client and asked why they said they used this method they said they didn't understand what they were doing.
What can I do now? Is the only option to carry the loss forward or can this be rectified?
The cash basis only came in for tax year 2013/14 onwards. But you say for that year they paid tax of £892.
If you are doing the 2014/15 tax return and thats where the loss is you could do that on the accruals basis and carry back as normal.
I know you cant use a loss under the cash basis to get sideways relief ie relief against other income in the same tax year but off the top of my head dont know if you are prohibited from carrying back the loss under the accruals basis.
Thats why i am doing the ITP (ICAS Tax Practitioner) course next year to bring my tax knowledge up to date.
