In the early days of running your own business, you may encounter business losses—when your expenses exceed your sales. This can happen at any time, regardless of whether you’ve had a year with low performance or made large investments in the business. No one sets up a limited company to lose money, but it happens. When it does, knowing how to handle tax losses is important, and it often brings good news.
Offsetting Tax Losses in the Current Year
A silver lining of making a loss is that you won’t have to pay corporation tax for that year. Even better, you can use your limited company tax losses to offset other taxes in different years.
There are three main ways to use corporation tax losses when your company makes a loss:
Offset Against Current Year Income
You can offset tax losses against other income, like bank interest or capital gains, within the same year. You must include this in your corporation tax return. If you don’t have other income, don’t worry—the next options might be more relevant.
Carrying Back Tax Losses for a Previous Year
You can carry back limited company tax losses for one year. You can set them against profits from previous years. If you made a profit in the past but lost money this year, you could reclaim your paid corporation tax. This is done via the corporation tax return. Your accountant can elect to carry back the tax losses. HMRC should send you a repayment in due course—although they can take their time! If you have unpaid corporation tax from prior years, you can ask HMRC to offset your refund with that debt. They will carry forward any unused losses.
Carrying Forward Losses for Future Profits
Finally, the most common option: you can carry forward tax losses to offset future profits. If you lose money in the first few years, those losses will reduce future taxable profits. For example, if you lose £10,000 in the first year and £5,000 in the second, you won’t pay corporation tax until you have made £15,000 of profit. Business losses will keep carrying forward until there is profit to use them against.
Why Understanding Tax Losses Is Essential for Your Business
Small business owners must understand tax losses, especially during challenging times. In the early stages of your business or after major investments, you may incur business losses. It may seem disheartening. But limited company tax losses can help reduce taxes. Using past or future profits to offset corporation tax losses can cut your tax bill. It can also boost cash flow. This is vital when your business needs relief the most. Using tax losses can improve your finances. It helps you make better long-term decisions for your business’s growth.
To discuss how to navigate tax losses and their silver lining, contact us at 2 Sisters Accounting.
