Tax Relief for Opening Year Losses

Opening Year Loss Relief

When starting a new business, it is incredibly common for Tax losses to arise in the initial trading period. HMRC understand this and appreciate that it takes a few years for some businesses to become established. Further HMRC are aware that for some Tax payers, the money that has been used to invest in the new business has come from other savings where Tax has been paid. With this in mind, HMRC created an “Early Trade Loss Relief”.

Early Trade Loss Relief

This form of Tax relief, designed for new business startups in mind, allows the business owner(s) to carry back the losses in the first four years, to offset against income three years previous Taxable income. This form of Tax relief can be quite rewarding, and for those individuals that prepare their own Tax return, it’s an area that they miss out on.

Pre Trading Expenditure

Pre trading expenditure is fairly straight forward and is simply a term used to explain any expenditure by the business owners prior to actually starting the new business. Examples of pre-trading expenditure could include:

  • Computers and software
  • Stationery
  • Advertising
  • Telephone and internet expenditure
  • Tools and equipment
  • Other related business expenditure

Any expense incurred in the seven years preceding to the business starting up is deemed to have been incurred on the first day of trading.

If you combine this rule with the Early Trade Loss Relief, you can soon appreciate that a sizeable Tax loss can be created in the first year results. Given that the current top rate of UK Income Tax is 45% and the current rate of National Insurance is 9%, it essentially means that for every £1,000 you have spend investing in your business, you could potentially recoup up to 54% of your costs back. That’s just over half of the costs.

Separating Tax Losses from National Insurance Losses

This is an area that is even missed by accountants and Tax advisors but it could save you an extra 9% on your losses. Many people simply don’t appreciate that losses arising in a trade can be carried back, or forward in two ways. The Tax loss can be used differently to the National Insurance (NI) loss. For example, the NI loss should be used against profits of the same trade, and cannot be used against income three years previous, whereas Income Tax losses can be carried back three years.

When a loss has arisen, careful judgement should be carried out to ascertain which years you should allocate the Income Tax and National Insurance losses to. In some cases, the losses can be offset against the same period, i.e. the current year, or the previous year. But in other cases, it may make more financial sense to allocated the losses differently.

Comments (4)

Jason Potts

what year can i claim for? I started last may Reply


Evening Jason,

Your first Tax year won’t end until 5th April has passed. Once you’ve calculated your profits (or losses) in your first year, you’ll be able to assess the matter more.

If you’ve made a loss this year (your first year) 2017/18, then you can carry the loss back to 2016/17, or carry back three years ago. It’s best selecting the year where you have earned and paid the most Tax. This will allow you to get the most Tax relief. Reply

Alan Biggs

is this allowed if I’ve just set up a shop? I had to pay a fortune for fitting the shop with shelves, never mind the stock. With advertising and all of the other costs you mentioned above, I think I’ve lost around £10,000 in the first year. Although I’m making a profit now. Reply


Hi Alan,

First of all congratulations on going self-employed. We wish you the best of luck.

With regards to your opening year loss, you have a number of options:
1) Offset it against income for the current year
2) Offset it against income for the preceding Tax year
3) Offset it against income you generated three years previous.

Where you offset the loss should generally be the year where you have paid the most Income Tax.

Hope this helps! Reply

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