Self Employed Losses
Self employed - trading losses and how to use them
Getting to the end of your year of self employment and realising you have made a loss can feel like a waste of your hard work. Even if you knew that your set-up expenses were going to be huge and the chances of making any profit were low, it can still feel disheartening. However, knowing that you can make those losses work hard for you in subsequent years can be a small recompense. Additionally, you may be able to make the most of the situation where other self employed people are missing opportunities.
Work on an accrual basis
The first step towards making your losses work for you is to run your business on an accrual basis rather than a cash basis. With accrual, you account for revenue when it is earned (not when it is paid to you) and for expenses when they are incurred (not when they are paid by you). The cash basis accounts for income and expenses when the are actually received or paid (ie when the money enters or leaves your bank account).
If you work on a cash basis, your losses can only be carried over to the next year - not used to allow you a refund in previous years. This is why cash basis is the HMRC default as carrying your losses forward is very rarely the best way to deal with them.
Getting a tax refund
There are a number of ways you can use your losses to your advantage now, rather than wait for subsequent years when you may or may not end up making a profit.
● You can offset your self employed losses against any other income you have earned during the year. This may be other self employed income or employed PAYE. This is ideal if you started your business part way through the tax year and had a job for part of it. Or if you are running your self employed business alongside your employed work.
● You can also carry the loss back to the previous year and get a refund on the tax paid last year. It is worth noting that a new business that makes a loss during the first 4 years can offset it against losses in the preceding three years - starting with the earlier year first.
● If you cease to trade and you made a loss during the year that you close the business, you can offset it against the trading profits during the preceding three years - with the latest year first.
This may all sound a little confusing to a layperson, but if you talk it through with your accountant they will be able to work out the best approach for your business. The aim is to get more of your tax back this year, rather than waiting for the years to come. More money to invest in your business, so that you can make it work in the long term. That just makes good sense.