What is a trading loss?
A trading loss just means your company's business cost more to run than it earned that year. You sold £30,000 of work but spent £38,000 keeping the business going, so you're £8,000 down. That £8,000 is a loss.
A loss isn't only bad news. The tax rules let you use it to pay less tax, either on another year that made money, or on a year still to come. The trick is knowing which way to point it.
Can a loss save me tax?
Yes, but only if your company has, or will have, a year that made a profit to set the loss against. A loss reduces tax by cancelling out profit somewhere, so it needs a profit to cancel. You have three ways to use one.
1. Use it in the same year
If your company made money in one part of the business and lost it in another during the same year, you set the loss against the profit first. You only pay tax on what's left over.
2. Carry it back to last year
This is the one people miss. If your company made a profit last year and paid tax on it, you can carry this year's loss back by one year and set it against that profit. Because you already paid the tax, HMRC pays some of it back to you.
Two things to know. Your company has to have been doing the same kind of trade in both years. And there's a time limit: you have to make the claim within two years of the end of the year the loss falls in. Leave it too long and the chance is gone.
3. Carry it forward to a future year
If there's no profit this year or last year to soak the loss up, you can carry it forward and use it against the profit of a future year, for as long as your company keeps running the same business. The loss waits until you make money again, then lowers that year's tax.
Do I have to do anything to claim it?
Yes, and this is the part that catches people out. A loss does not save you anything on its own. You have to put the claim on your company tax return for it to count. If your company made a loss and you never file, or you file but don't claim the loss, you lose the benefit. You must file to claim it.
A worked example, in real pounds
Say last year your company made a £20,000 profit and paid Corporation Tax on it at 19%, that's £3,800 of tax, already paid.
This year is harder and your company makes an £8,000 loss. You carry that loss back to last year. It knocks £8,000 off last year's profit, so instead of being taxed on £20,000, your company should only have been taxed on £12,000. The tax on £12,000 at 19% is £2,280.
You already paid £3,800, but the right figure was £2,280. So HMRC pays you back the difference: £3,800 − £2,280 = £1,520 back in your pocket.
That £1,520 only comes back because you filed and made the claim. Skip the return and you'd have lost your year's tax twice over, once on the bad year, and once on the refund you never asked for.
How SimpleReturns handles it
Connect your bank or upload a statement, and we turn your year's figures into proper company accounts and the tax sums that go with them. If that works out to a loss, we work out whether carrying it back, forward, or using it in-year saves you the most, and we put that claim on your return before anything is sent. You don't have to know which of the three ways applies, we pick it and show you the figure.