Trading losses for sole traders & companies: Using them effectively

Melanie Richardson


The economy has been hard hit by Covid for the last 18 months, with many businesses completely shut for much of 2020. Unincorporated businesses and companies may have even made a loss for the first time, both can offset losses against profits, make sure that this is accounted for in the optimum way.

Trading losses for unincorporated businesses

Unincorporated businesses can use losses in various ways:

  • For losses incurred in the first four tax years of a new business, there is the option to carry back the loss against total income of the three preceding years
  • This can potentially lead to large repayments of tax previously paid at the higher or top rates, if the business owner was previously in high earning employment. Otherwise, there is normally only a one year carry back available against total income
  • The Chancellor has introduced a temporary extension to this one year loss carry back, so that trade losses can be carried back a further two years, but against trade profits only.
  • Setting losses against capital gains in some circumstances
  • Special rules on the cessation of trade and carrying a loss forward against future trading profits

Trading losses for companies

Companies are treated differently unincorporated businesses and losses generally have to be used within the company structure.

  • Company trading losses that have been incurred since 1 April 2017 can be carried forward to set against total profits. There is also a one year carry back option available, again against total profits.
  • To help companies generate repayments of tax that aid their cash flow, the loss carry back has been temporarily extended to 3 years.
  • This extended carry back is not restricted to trading profits; it applies for accounting periods ending in the 12 months from 1 April 2020 and in the 12 months from 1 April 2021. For each of these accounting periods, the maximum loss that can be subject to the extended carry back is £2m.

Corporation tax rates are due to increase significantly for most companies from 1 April 2023, so it may be better to carry losses forward than carry them back if you think that business might pick up

If you think you might have made a loss and would like more advice on how to use losses most effectively, please get in touch with your usual Swindells’ partner.

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