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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Farming losses: operation of five year rule

S67, S70 Income Tax Act 2007

The loss incurred in a tax year is caught by the five year rule where a loss computed without regard to capital allowances is incurred in each of the five preceding tax years. The year of commencement is not counted for this purpose so, in the case of a new business which makes losses consistently, the loss of the seventh tax year is the first to be caught.

Example

Henry Green commenced trading as a farmer on 6 April 2001 and makes up his accounts annually to 5 April. His results were as follows:

Period of account Trade profit or loss (excluding CA) Capital allowances
     
Year ended 5.4.02 Loss £1600  
Year ended 5.4.03 Loss £500  
Year ended 5.4.04 Loss £1250  
Year ended 5.4.05 Loss £3040 £1240
Year ended 5.4.06 Loss £4030 £930
Year ended 5.4.07 Loss £3600 £1400
Year ended 5.4.08 Loss £5750 £1050
Year ended 5.4.09 Loss £4750 £850
Year ended 5.4.10 Loss £5900 £700
Year ended 5.4.11 Profit £900 £1300
Year ended 5.4.12 Loss £7100 £1000
Year ended 5.4.13 Loss £8480 £880

Henry claimed trade loss relief against general income for all available years. Relief was available or restricted as follows:

Year of assessment Relief available Explanation
     
2001-02 £1600 Relief is available on the full loss
2002-03 £500 Ditto
2003-04 £1250 Ditto
2004-05 £4280 ditto
2005-06 £4960 ditto
2006-07 £5000 Relief is available on the full loss. Although a loss was incurred in each of the five preceding years, 2001-02 is disregarded for the purpose of the five year test as it was the year of commencement
2007-08 Nil A loss was incurred in each of the five preceding years, which do not include the year of commencement. The five year rule applies and trade loss relief against general income is denied
2008-09 Nil The five year rule still applies and trade loss relief against general income is denied
2009-10 Nil The five year rule still applies and trade loss relief against general income is denied
2010-11 Nil In this year Henry made a profit before capital allowances but a loss after capital allowances had been claimed. As the trade made a loss in the tax year, and a loss was made in the previous five tax years, Henry remains unable to claim trade loss relief against general income.
2011-12 £8100 There is a loss before capital allowances in this year but in the previous tax year Henry made a profit before capital allowances. The run of consecutive losses computed without regard to capital allowances is therefore broken. A new five year period of consecutive losses will need to be built up before the five year rule can bite again. Relief is available on the loss without restriction
2012-13 £9360 Relief is available on the full amount of the loss