Trade losses: when a loss is made
The statutory provisions allow a claim for a loss made in a tax year in a trade (including a profession or vocation), subject to the claim being made within the time limit (see BIM85065 onwards). We do not insist that loss relief claims should be quantified precisely. A ’best estimate’ claim could be made in advance of accounts being prepared, with the final figure following as soon as possible.
Even if we are satisfied that there is likely to be an economic loss (i.e. the outgoings will exceed all possible income for the period) it is not possible to say that a loss has been made for tax purposes until the accounting period is complete.
In the case of Jones v O’Brien  60TC706, involving profits from trade carried on abroad, Hoffmann J held that the Revenue could not raise an in-year estimated assessment on income assessable on a current year basis:
`Tax chargeable ……. is computed on the full amount of the income arising in the year of assessment. There is no charge to tax on the income per diem in diem as it arises during the year. In my view the imposition of liability to tax on the full amount of the income arising in a year necessarily entails that the year has elapsed. Until then the profits in respect of which he is liable to tax will not exist and therefore no charge to tax can attach.’ (714)
S26 Income (Trading and Other Income) Act 2005 provides that a trade loss is calculated on the same basis as a profit. This means that the comments in the O’Brien case are equally applicable to losses.
The same principle applies where the results of more than one accounting period are required to compute the profit/loss for a tax year.
For example, a trade commences on 1 December 2012. The first accounting period is 1 December 2012 to 31 January 2013 and gives rise to a loss. The next accounting period is 1 February 2013 to 31 January 2014. The basis period for 2012-2013 is 1 December 2012 to 5 April 2013. The latest relevant accounting period is 1 February 2013 to 31 January 2014.
A ‘best estimate’ loss relief claim cannot be made until after 31 January 2014. Only then is it possible to say whether a loss has been made for 2012-2013.
But, in a continuing trade with an annual accounting date of 31 January, a claim could be made on say 28 February 2013 to relief for losses made in the accounts to 31 January 2013 (2012-2013) against general income for 2011-2012. This would constitute a stand-alone claim (Sch1B Taxes Management Act 1970). We would not need to know the profit or loss for the rest of 2012-2013 because that profit or loss relates to 2013-2014 and all the periods of account (the periods for which accounts are drawn up) which are included in the basis period for 2012-2013 are complete.
For further information on claims generally see SACM; in particular, information on claims affecting two or more years is at SACM11005.