When a UK business makes a trading loss, it does not simply lose the tax benefit of that expenditure. HMRC provides several mechanisms to use losses to reduce tax on profits earned in other periods or by other group companies. Understanding how to use losses efficiently can significantly reduce the overall tax burden.
The rules differ depending on whether the business is a company paying corporation tax or an unincorporated business (sole trader or partnership) subject to income tax through self-assessment.
Corporation Tax Losses
Carry Forward
A company can carry forward trading losses indefinitely to set against future profits of the same trade. From 1 April 2017, carried-forward losses can also be set against total profits (not just trading profits), subject to a £5 million deductions allowance plus 50% of remaining profits.
| Element | Rule |
|---|---|
| Time limit | No limit; losses carry forward indefinitely |
| Offset against | Future total profits (trading profits, investment income, capital gains) |
| Deductions allowance | First £5 million of profits fully available |
| Restriction | 50% of profits above £5 million |
Worked Example: Carry Forward
A company has carried-forward losses of £8 million and makes a profit of £12 million in the current year.
| Step | Amount (£) |
|---|---|
| Total profit | 12,000,000 |
| Deductions allowance (first £5m) | 5,000,000 |
| Remaining profit | 7,000,000 |
| 50% of remaining profit | 3,500,000 |
| Total loss relief | 8,000,000 |
| Taxable profit | 4,000,000 |
The full £8 million is relieved because it falls within the combined £5 million allowance plus 50% of the remaining £7 million (£3.5 million), totalling £8.5 million of available relief.
Carry Back
Trading losses can be carried back 12 months against total profits of the preceding accounting period. The claim must be made within two years of the end of the loss-making period.
| Element | Rule |
|---|---|
| Carry-back period | 12 months |
| Time limit for claim | Two years after end of loss-making period |
| Offset against | Total profits of the preceding period |
| Priority | Current-year relief is given before carry back |
Sideways Relief (Current Year)
A company can set trading losses against its total profits of the same accounting period. This means losses from one trade can offset investment income, property income and capital gains arising in the same period.
Order of Loss Relief
When a company has multiple options, the typical order is:
- Current-year offset against total profits
- Carry back to the preceding 12 months
- Carry forward against future profits
There is no obligation to claim in this order, and companies can choose the most tax-efficient combination.
Group Relief
Companies within a 75% group (where one company owns at least 75% of the ordinary share capital of another, directly or indirectly) can surrender trading losses to other group members through group relief.
| Requirement | Detail |
|---|---|
| Ownership threshold | 75% ordinary share capital, directly or indirectly |
| Type of losses | Current-year trading losses, excess management expenses, non-trading loan relationship deficits |
| Direction of surrender | The loss-making company surrenders to a profitable group company |
| Time limit for claim | Two years after end of the claimant company’s accounting period |
| Amount | Up to the claimant’s available profit for the corresponding period |
Consortium Relief
A consortium exists when a company is owned by five or fewer companies, each holding at least 5% and together holding at least 75%. Each consortium member can claim group relief limited to its percentage shareholding of the surrendering company’s losses.
Group Relief for Carried-Forward Losses
From 1 April 2017, carried-forward losses can also be surrendered between group companies, subject to the same £5 million deductions allowance and 50% restriction that applies to the surrendering company’s own carried-forward losses.
Income Tax Losses (Sole Traders and Partnerships)
Carry Forward
An unincorporated business can carry forward trading losses indefinitely against future profits of the same trade.
Sideways Relief
Trading losses can be offset against the individual’s total income for the same tax year or the preceding tax year. This allows a trade loss to shelter employment income, investment income and other sources.
| Claim | Time limit |
|---|---|
| Current year sideways relief | One year after 31 January following the tax year |
| Carry back to preceding year | Same deadline |
| Carry forward | Four years from 31 January following the tax year |
Cap on Sideways Relief
Sideways relief for income tax losses is capped at the greater of £50,000 or 25% of the individual’s adjusted total income. This prevents wealthy individuals from sheltering large amounts of non-trading income with trading losses.
Early Years Relief
In the first four tax years of a new trade, losses can be carried back against total income of the three preceding tax years (earliest first). This can be particularly valuable for new businesses that make losses in their early years while the proprietor had employment income in prior years.
Capital Losses
Capital losses (from the disposal of assets) follow separate rules:
| Rule | Corporation tax | Income tax |
|---|---|---|
| Offset | Against capital gains only | Against capital gains only |
| Carry forward | Indefinitely | Indefinitely |
| Carry back | Not permitted (except on cessation) | Not permitted (except in year of death) |
| Group relief | Not available through standard group relief | N/A |
Capital losses cannot be set against trading profits or other income.
Property Losses
Losses from a UK property business are carried forward and set against future profits of the same property business. They cannot be offset sideways against trading income.
| Type | Treatment |
|---|---|
| UK property loss (company) | Carry forward against future property income |
| UK property loss (individual) | Carry forward against future property income |
| Furnished holiday lettings loss | Only against future FHL profits |
Loss Buying
HMRC has anti-avoidance rules to prevent companies from acquiring other companies purely to access their tax losses. If there is a change in ownership and a major change in the nature or conduct of the trade within a three-year window (either side of the ownership change), the carried-forward losses may be disallowed.
| Trigger | Consequence |
|---|---|
| Change of ownership + major change in trade | Losses before the change cannot be carried forward |
| Change of ownership + significant increase in capital | Losses before the change may be restricted |
Practical Considerations
Record Keeping
Companies and individuals must maintain records of all losses claimed, carried forward and utilised. HMRC does not track loss balances automatically; it is the taxpayer’s responsibility to maintain accurate records and claim relief correctly.
Time Limits
Failure to claim loss relief within the statutory time limits means the relief is lost permanently. Most corporation tax claims must be made within two years of the end of the accounting period.
Tax Planning
The choice of how to use losses involves trade-offs. Carrying back losses generates an immediate tax refund but may use losses that would be more valuable against future profits taxed at a higher rate. Group relief transfers the benefit to a different company, which may or may not be the most efficient outcome for the group as a whole.
Loss relief is one of the most valuable tools in UK tax planning. Using losses effectively requires careful tracking, timely claims and an understanding of how the various relief mechanisms interact.