Sadly, not all businesses will survive the Covid-19 pandemic, and many may take, or be forced to take, the decision to close where losses make the business untenable. The tax legislation provides various relief for losses including a special relief for losses made in the last 12 months of trading, known as terminal loss relief. A form of the relief is available for both income tax and corporation tax.
Income taxUnder the income tax rules, a terminal loss can be set against profits of the same trade for the year of cessation and against profits of the same trade for the three tax years prior to that in which the business was discontinued, with relief being given against profits of a later year before those of an earlier year. The terminal loss comprises:
- the loss made in the tax year in which the trade ceases; and
- the loss make in that part of the previous tax year beginning 12 months before the date that the trade ceased.
- 1/4/2020 to 30/9/2020: £20,000
- 1/10/2019 to 31/3/2020: £nil (profit of £4,000 for the period).
- £18,000 against the profits of 2019/20; and
- the remaining £4,000 against the profits of 2018/19 of £20,000, reducing the taxable profits to £16,000.
Corporation taxA similar relief is available for corporation tax, allowing companies to claim terminal loss relief when they stop trading. Any trading losses occurring in the final 12 months of trading can be carried back and set against the profits made in the previous three years. The loss must be set against the profits of the most recent year first.
For more information on terminal loss relief, Book a Free Consultaion
The post Terminal Loss relief appeared first on Makesworth Accountants.