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Effective tax planning is essential if you are to minimise your tax bills. Simple tax planning can significantly reduce your tax liabilities.

The self-assessment tax return is an unavoidable burden if you are liable for self-employed tax or have complicated income tax affairs.

Corporation tax is charged on a company's profits. If you trade as a limited company, ensure that paying this tax is as painless as possible.

National Insurance Contributions (NICs) are payable whether you are self-employed or employed by your own company, although different rates apply.

As well as your legal obligations, you’ll want to ensure that payroll is painless and that you use any opportunities to improve your tax-efficiency.

VAT

Effective VAT planning aims to ensure that VAT is relatively painless, and that you are reclaiming as much as possible of the VAT you pay.

Capital gains are made when you sell something for more money than you paid for it. As a result, you can be subject to tax. Take professional advice.

Business property taxes apply to businesses with commercial premises.There are two commercial property taxes: business rates and stamp duty land tax.

If you have tax problems or face a tax investigation, it pays to seek professional advice and you must act rather than just hoping for the best.

How to claim a tax refund against losses

Trading losses occur when your business expenses are greater than your business income. A business may become loss-making at any time - but the most common losses occur in start-ups, when start-up capital may be needed to create products and services

How to claim a tax refund against your losses, and how soon you get that refund, depends on whether you trade as a company, a partnership or a sole trader. Claire Georghiades FCA explains how to claim your refund.

Sole traders and partnerships

The easiest way and quickest way to claim a tax refund is through your personal tax return. For this, you need to be trading as a sole trader or partnership. The claim is the same for both. There are four ways to set off a loss:

  • You can claim relief against any other income for this tax year, the previous tax year or both. If your income is nil or less than the loss, you can reduce your capital gains for that year.
  • You can carry back losses incurred in the first four years of a trade for three years. You need to make sure your claim is made within the time limit.
  • You can claim relief against profits of the same trade in earlier years.
  • You can carry forward the loss against future profits of the same trade.

Claiming for loss relief against income

Normally, you'll make your claim for loss relief in your Self Assessment tax return. For sole traders, if you complete the short self-employment pages, you need to fill in boxes 33-35, or boxes 77-80 in the long self-employment pages. If you are in a partnership, fill in boxes 21-24 on your partnership pages.

If you're carrying back losses, you need to provide additional information in the ‘any other information’ box. This can be done on the self-employment page or on the tax return. You need to state the following:

  • the earlier year, and if the loss is carried back to more than one earlier year
  • the amount of loss to be deducted in calculating your net income for each earlier year

Making tax adjustments for earlier years

This is more complicated. If you're claiming loss relief in respective of earlier year(s), you need to calculate the amount of the tax refund.

  • You must calculate the difference between the actual tax liability and the liability that would have arisen for each earlier year.
  • Enter the amount of the tax refund. Put this figure in box 15 on the tax calculation summary pages of a paper return. For an online return, you need to complete the ‘decrease in tax due because of adjustment to an earlier year’ box. This will trigger the loss relief claim.

Carrying forward the loss against future profits

You can also carry forward your loss, or the unused part of the loss, against future trading profits. Or, you can carry forward your loss, or the unused part of the loss against income from a company, provided that

  • you transferred your business to the company in exchange for shares;
  • you still own the shares.

You must deduct the loss from profit in the trade, or income from the company, in the following year and each subsequent year until the loss is used up.

Making claims outside your personal tax return

In certain circumstances you may want to make a claim in advance of the tax return. This is known as a 'stand alone claim'. In this case, you must write a letter telling HMRC the following details:

  • the name of your trade
  • how much the loss is and for what period
  • how you want to use the loss

You must also repeat the claim in your tax return for the year of loss and give details of the tax repaid or set-off in the ‘any other information’ box on the self-employment pages or on the tax return.

What if I've stopped trading?

If your trade ceased, and you made a loss in the final 12 months of the trade, you can claim relief against profits in the final year of trading. If any loss remains, use this against profit in the trade in the three prior years. Start with the latest year.

You can find more guidance in the HMRC Helpsheet 227 Losses.

Company losses

Trading losses can be offset against profits from the same trade in future accounting periods. You don’t have to make a claim for this. The claim is done automatically when you fill out your Company Tax Return. However, if you carry forward your company losses you will have to wait until the company is profitable. So, you may have to wait a while to claim your tax refund.

Instead of carrying a loss forward, you can claim for the loss to be offset against profits for the preceding 12-month period - but only if your company existed in the preceding 12-month period. This will not work if you are a start-up.

Capital allowances

One more thing to consider when calculating your losses is capital allowances. Is it better to claim full capital allowances to maximise your tax loss? Or, would you be better carrying forward a larger asset pool to reduce your tax bill in the future?

Written by Claire Georghiades FCA.

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