Relief for losses in the early years of a trade

Relief for losses in the early years of a trade
It is not uncommon to realise a loss in the early years of a trade. However, traders who commenced their self-employment in 2019 or 2020 may also have suffered as a result of the pandemic. Although the Self-Employment Income Support Scheme (SEISS) provided help for traders who also suffered from the impact of the pandemic, those who started trading in 2019/20 were unable to benefit from the first three grants (qualifying only for grants 4 and 5 if they had filed their 2019/20 tax return by 2 March 2021 and met the other eligibility criteria). Traders who started a business in 2020/21 are not able to benefit from the SEISS.
However, they may be able to claim loss relief under the early trade losses relief rules, and generate a tax repayment in the process.
Nature of the relief
The relief for losses in the early years of the trade allows a trader who makes a trading loss in any of the first four years of a new trade to carry that loss back against taxable income of the previous three years. The loss is set against the income of the earliest year first.
Accruals basis not cash basis
Relief for the loss under these rules is only available where the accounts are prepared on the accruals basis. Thus, if losses in the early years are likely, it is worth considering preparing accounts using the accruals basis to open up a claim to relief. This relief is not available where accounts are prepared under the cash basis – where this is the case, the loss can be carried back against any previous trading profits of the same trade, should they exist, or carried forward and set against future profits of the same trade.
Case study
Polly was employed as a beautician earning £25,000 a year prior to setting up her own beauty business on 1 June 2020. Her business was badly affected by the pandemic, and in the 10 months to 5 April 2021, she makes a loss of £10,000. This is a loss for the 2020/21 tax year.
She can carry the loss in her first year back against her income of 2017/18, 2018/19 and 2019/20, setting the loss against her income for 2017/18 first.
She carries the loss back to 2017/18, setting it against her employment income for that year of £25,000, reducing her taxable income to £15,000 in the process. Carrying the loss back generates a tax repayment of £2,000 (£10,000 @ 20%).
Personal allowances may be lost
It should be noted that the loss carried back cannot be tailored to preserve personal allowances, which may be lost as a result.
Claim tax relief for additional costs of working from home

Claim tax relief for additional costs of working from home
During the Covid-19 pandemic, the advice was ‘work from home if you can’. As a result, millions of employees found themselves working at home, often at very short notice. Many still have not returned to the workplace, and homeworking (whether fully or flexibly) is here to stay.
Employees will generally incur additional costs as a result of working from home. They will use more electricity to run their computer and light their workspace and may use more gas as a result of having the heating on during the day.
While for many years there has been a statutory exemption that allows employers to meet or contribute towards the additional costs of working from home, in recognition of the homeworking requirements imposed by the pandemic, employees who do not receive homeworking payments from their employer are able to claim tax relief for the extra household costs that they have incurred while working from home.
Exemption for costs met by the employer
Employers can pay employees a homeworking allowance of £6 per week (£26 per month) tax-free, and without the employee having to demonstrate that they have actually incurred additional household costs of at least this amount as a result of working from home. The tax-free amount is the same, regardless of whether the employee is required to work from home full-time or one day a week. Consequently, the payments can be made to employees who work flexibly, working from home part of the time and at the employer’s workplace part of the time.
Where the employee’s actual additional household costs as a result of working from home are more than £6 per week, the employer can meet the actual costs tax-free, as long as the employee is able to provide evidence in support of the actual additional costs.
Tax relief for employees
Employees who have been required to work from home can claim tax relief for the additional costs of doing so where these are not met by the employer. HMRC will accept claims of £6 per week/£26 per month without needing evidence of the actual additional costs. Where these are higher, the higher amount can be claimed, as long as this can be substantiated.
HMRC are now accepting claims for 2021/22. Claims can be made online at www.tax.service.gov.uk/claim-tax-relief-expenses/only-claiming-working-from-home-tax-relief?_ga=2.193253997.1398232652.1624373729-980780301.1612354164.
Relief is given for the full tax year, even if the employee returns to the workplace before 5 April 2022. Employees who were entitled to the relief for 2020/21 can also claim for that year if they have not yet done so.
Where an employee is required to complete a self-assessment tax return, the claim can be made on the return.
A claim of £6 per week (£312 for the year) will save a basic rate taxpayer £62.40 in tax and a higher rate taxpayer £124.80 in tax.
Limited liability partnerships

Limited liability partnerships
A limited liability partnership (LLP) is not a partnership but a body corporate with a difference – there are no shareholders or guarantors (as there would be for a company limited by guarantee) but partners (designated ‘members’) carrying on a trade or business with a view to profit. It is a structure commonly used by professionals such as doctors, attorneys, and accountants who go into practice together.
As a ‘body corporate’ it must be registered with Companies House however, the entity does not pay Corporation tax, instead the individual members are subject to the normal partnership rules (i.e. taxed individually as being self employed on their respective share of the profit) regardless of the amount they withdraw from the business.
Members receive an income/profit share proportionate to their capital account balance. However, certain members can be allocated a disproportionate amount of profit by allowing a ‘salary’ in recognition of the work they do, which could be disproportionate to their income/profit share e.g. a new member may contribute little or no equity but take on a significant share of the management of the business. There are anti avoidance rules in place that treat a member as employed should they receive a fixed rather than varied amount of partnership profit.
Number of members
Each LLP must have at least two ‘designated’ members responsible for various administrative tasks; however there is no upper limit to the number of members. Members can be either individuals or limited companies with each member being able to sign binding contracts on behalf of the LLP (thus avoiding a problem sometimes encountered by ordinary partnerships where every partner has to sign certain documents).
Advantages of an LLP
The main advantage of setting up an LLP is to give some protection to a member going bankrupt where claims are made against the LLP only and members’ personal liability is limited to their capital contribution. However, all members can be held responsible for another member’s negligence if that negligent member is operating within the scope of their authority in the business. In comparison a partner’s personal assets can be seized to settle the partnership’s debts in an ordinary partnership.
A further potential advantage is that under an LLP structure different proportions of income and capital entitlements can be allocated each year to the different members; this makes LLPs a flexible method of withdrawing profits particularly where different members have different percentage interests in the business e.g. one member may undertake the majority of the administration but have a lower percentage interest in the partnership. In this instance that member can be allocated a higher (variable) share of the profit rather than being paid a fixed salary for the work involved. This ability to change the profit split year on year is also a benefit for those partnerships with different members with different marginal tax rates.
If an LLP goes into liquidation it is treated as a company rather than a partnership for Capital gains tax purposes.
Loans to participators

Loans to participators
Where a close company (or LLP) makes a loan (otherwise than in the ordinary course of a business) to an individual who is a participator or an associate of a participator, a tax charge of 32.5% is payable by the company should that loan remain outstanding nine months after the end of the accounting period. The charge applies to loans to directors who are also participators, to participators who are not directors, but it does not apply to directors who are not also participators.
A ‘participator’ may be a shareholder of the company whose interest in the company is more than 5% of the share capital but the definition also includes any person having a share or interest in the capital or income of the company. An ordinary trade creditor is not a ‘participator’.
A ‘close company’ is a UK resident company under the control of:
(a) 5 or fewer participators, or
(b) of any number of participators who are also directors.
The rate of tax payable is the same as the higher ‘dividend tax’ rate at 32.5%. Should the charge be paid and then the loan subsequently be repaid, repayment can be claimed but will not be so until nine months and one day after the end of the company’s accounting period in which the loan was repaid or reduced.
Where the loan has been made before the individual becomes a participator e.g. the loan is made to an individual who subsequently becomes a shareholder, then no charge is levied provided there is no link between the loan and the individual becoming a shareholder.
Material interest
As long as the participator is not also a director or employee in the company, there is no immediate tax charge for the participator. The scenario is different where the participator does not have material interest but works full time for company as there will be a charge under the benefit in kind rules should the loan exceed £15,000. There is also the possibility of a double income tax charge if the loan is subsequently waived or written off. In such circumstances not only will there be a benefit in kind on the granting of the loan but HMRC could deem the waiver to be a distribution to a participator or as earnings to a director or employee. However, there is provision in the legislation that prioritises the distribution treatment in this situation. There is no similar provision in the national insurance legislation and so this means that the income would be taxable as a distribution (dividend income) and Class 1 national insurance (both employer’s and employee’s contributions) be payable. In most small companies the director will be a shareholder entitled to vote at board level and so will also be a participator. Therefore, the distribution treatment will apply to any loans made and written off to the director or his family.
A participator who does not have material interest but works full time for company could receive small loans over several accounting periods such that eventually the aggregate exceeds the £15,000 exemption limit. HMRC’s gives the example of a director receiving:
- £5,000 in accounting period 1
- £2,000 in accounting period 2
- 10,000 in accounting period 3
Individually these loans would qualify for the exemption but in total an amount of £17,000 has been received. HMRC state that the two earlier amounts in period 1 and 2 meet the requirements for the exemption and therefore the company is not charged on those amounts. However, the full amount of £10,000 in period 3 is chargeable as not meeting the condition under s456 CTA 2010 which states that:
- the amount of the loan in question plus the outstanding amounts of loans made to the borrower does not exceed £15,000 (Condition A)
Details of the loan are required to be declared on the company tax return; the usual interest being charged on payments made late to HMRC.
Restart Grants and Recovery Loans

Restart Grants and Recovery Loans
As lockdown restrictions are eased, businesses may need help to re-open and to recover from the impact of the pandemic. Depending on the nature of the business, they may be eligible for a Restart Grant or a Recovery Loan.
Restart Grants
The Restart Grant Scheme provides support to help business that were required to close to re-open as lockdown restrictions are eased. The grants are available to businesses in non-essential retail and businesses in the hospitality, accommodation, leisure, personal care and gym sectors.
The grants are available from 1 April 2021 and must be claimed from the local council. Applications can be made on the relevant council’s website.
To qualify, a business must:
- be based in England;
- pay rates; and
- be trading on 1 April 2021.
Non-essential retail business can apply for a Restart Grant of up to £6,000, whereas businesses in the hospitality, accommodation, leisure, personal care and gym sectors can apply for a Restart Grant of up to £18,000. Local councils will use their discretion to determine whether a business is eligible for a grant.
Recovery Loan Scheme
The Recovery Loan Scheme is designed to provide access to finance for UK businesses as they recover from the impact of the Covid-19 pandemic. Businesses of any size can apply for loans under the scheme, and can benefit from a loan or overdraft of between £25,001 and £10 million per business or asset finance of between £1,000 and £10 million per business. However, the amount offered and the terms are at the discretion of the lender.
To encourage lenders to participate, the Government guarantee 80% of the finance to the lender; however, the borrower remains liable for 100% of the debt.
A business can apply for a Recovery Loan if it is trading in the UK. Applicants will need to demonstrate that their business:
- would be viable were it not for the pandemic;
- has been adversely impacted by the pandemic; and
- is not in collective insolvency proceedings.
Businesses that meet the eligibility criteria can apply for a recovery loan, regardless of whether they also have a Bounce Back loan or a Coronavirus Business Interruption Loan. Under the scheme, no personal guarantees are taken on facilities up to £250,000, and a borrower’s principal private residence cannot be taken as security.
The scheme is due to run until 3 December 2021.
Directors’ loan accounts

A ‘Directors Loan Account’ (DLA) is an account in the company’s financial books that records all transactions between a director who is a participator (or another participator) and the company.
Transactions through the account include:
- a loan to the company from the director; or visa versa
- monies drawn by the director on account of salary, dividend or expenses
- director’s private bills paid for by the company
- company bills paid personally by the director
- shares issued on company incorporation but not paid for
Salary paid directly to a director under a contract is not recorded in the DLA as the monies will have been paid and therefore not owed by the company.
DLA in credit
When a company incorporates it is not unusual for directors to lend money to the business and this will show in the DLA as a ‘loan’ from the director to the company. As the DLA will be in credit, the director can draw on the credit balance at any time with no tax or National Insurance implications for either him/herself or the company. However, if the company pays interest on the loan, the director will be liable for tax on that interest, declaration being on the personal tax return. The company also needs to declare the payment to HMRC.
A DLA may also have a credit balance should salary or dividends be allocated to a director, but they do not draw payment. Non take-up may be for various reasons e.g. the company may be experiencing cash flow problems or the director may receive other income that might take him into higher rate tax and he does not want that to happen.
DLA in debit/overdrawn
Company
Invariably the DLA will be overdrawn throughout the accounting year as directors withdraw payments on account of dividends and expenses from the company bank account – each payment being recorded in the DLA. The directors may be liable to pay a benefits-in-kind tax charge if the outstanding balance on the director’s loan account is more than £10,000 at any point in the tax year. The company will be liable to Class 1A employers NIC.
At the end of the year, it is not unusual to find that insufficient profits have been generated to cover the amount that has been withdrawn, even after taking the salary and dividends into account, the net result being that the director will owe money to the company as the account will be overdrawn.
This overdraft must be repaid if there are to be no tax implications for both the director and the company. Should the loan exceed £15,000 and be made to a full-time working director whose interest in the company is more than 5% of the share capital then the loan needs to be repaid by the due date of payment of corporation tax (i.e. within nine months and one day of the accounting period). If this does not happen then the company is liable to a tax charge at 32.5% (a ‘section 455’ charge) on the outstanding loan at that date. If the loan is subsequently repaid after the charge has been paid then the tax is refunded (although not until nine months and one day after the end of the company’s accounting period in which the loan is repaid or reduced).
Director
Should the total of all outstanding loans from the company exceed £10,000 at any time during a tax year then the director is considered to have received a ‘benefit in kind’ from his employment. The charge is on the difference between the interest paid (if any) and interest payable at the ‘official rate’. The company will pay employers NIC on the charge and be required to declare the ‘benefit’ on the annual P11D form. HMRC is taking an increasingly dim view of such loans not least because remuneration or dividends are taxable as income when a loan is not. They will commonly ask for a detailed analysis of the DLA looking for such discrepancies as failure to notify liability to a section 455 charge. ‘Bed and breakfasting’ transactions (where the DLA loan is correctly repaid within the nine months stated but then the money is redrawn shortly after repayment through another separate loan) are also an area of interest as is failure by the company to apply PAYE at the correct time to bonuses credited to the DLA.
Super-deduction for capital expenditure

Super-deduction for capital expenditure
To encourage companies to invest, enhanced capital allowances are available for expenditure incurred within a limited two-year window. As an alternative to the annual investment allowance (AIA), companies will be able to benefit from either a super-deduction or a new first-year allowance, depending on whether the expenditure is on assets that would qualify for main rate capital allowance or for special rate capital allowances.
Super-deduction
The super-deduction will allow companies to claim capital allowances of 130% for expenditure on new assets that would otherwise qualify for main rate (18%) plant and machinery capital allowances where the expenditure is incurred in the period from 1 April 2021 to 31 March 2023. The super-deduction does not apply where the contract for the asset was entered into prior to 3 March 2021 (Budget Day), even if the expenditure is incurred in the qualifying two-year period. Plant and machinery which is purchased under Hire Purchase or similar contracts must meet additional conditions in order to qualify for the super-deduction.
Where an accounting period straddles 1 April 2023, the rate of deduction is apportioned based on the number of days in the accounting period falling before 1 April 2023 and the number of days in the accounting period falling on or after this date.
The effect of the super-deduction is that for every £100 of expenditure on qualifying assets in the qualifying period, the company can claim capital allowances of £130 when computing taxable profits. This gives an effective rate of relief of 24.7% (130% x 19%).
Where an asset which has benefited from the super-deduction has been sold, disposal receipts are treated as balancing charges rather than being taken to pools. A factor of 1.3 is applied to the disposal receipt when calculating the balancing charge.
Companies wishing to benefit from the super-deduction should plan the timing of investments in qualifying assets so that the expenditure is incurred in the qualifying two-year period. Where significant investment is planned after 1 April 2023, consideration could be given to accelerating the investment to benefit from the super-deduction.
A company does not have to claim the super-deduction. Where the company is loss-making or profits are low, it may wish to claim writing down allowances instead or tailor the claim to reduce the profit to nil. Likewise, if the plan is to sell the asset in a few years, it may be preferable to claim writing down allowances rather than suffer the balancing charge on the disposal.
New first-year allowance
A new first-year allowance of 50% is available for expenditure on most new plant and machinery that would otherwise qualify for special rate writing down allowances of 6% where the expenditure is incurred in the period 1 April 2021 to 31 March 2023. As with the super-deduction, it is only available to companies.
This is an alternative to the annual investment allowance, which gives a deduction of 100%. However, the first-year allowance may be beneficial where the AIA limit has already been reached.
Use of a Family Investment Company

Family Investment Companies (FIC) offer a tax efficient way to retain control over assets and still pass them on to the next generation. By providing a degree of flexibility they can be ‘fine-tuned’ to a family’s particular circumstances or requirements e.g. by drafting the company’s articles in such a way as to prevent the transfer of shares outside of the family.
For many people a trust is the most flexible way to achieve the same goal as the lifetime IHT threshold of £325,000 per individual is sufficient to mitigate potential tax liabilities, however, assets worth more transferred to a trust would be subject to an immediate IHT charge. A FIC enables a transfer of value above the IHT threshold without suffering a tax charge whilst still retaining control of assets. The main downside of a FIC is that the shares have to belong to someone whereas a trust can have beneficiaries that are still to be born (although shares can be held by a trust to benefit future grandchildren for example).
The method of setting up a FIC is the same as when incorporating any other company limited by shares, the difference being in the designation of those shares. For example, a donor (e.g. parent) would own one ‘A’ share with the right to appoint one director and the right to vote at general meetings but with no entitlement to dividends or any return of capital and the children would own one ‘B’ share each. These ‘B’ shares would have no voting or other ‘control’ rights but would have full entitlement to any dividends or return on capital (which must be approved by the parents). The ‘B’ shares could be created with differing rights including tax efficient withdrawal of capital, enjoyment of growth in capital value or a right to future dividends.
At the same time, the children/beneficiaries enter into a shareholders’ agreement, which is a private document setting out the directors’ powers and shareholders’ rights. This agreement together with the company’s Articles of Association are key to providing that control rests with the board of directors, usually comprising the donor and spouse or other trusted individuals. As with any other company limited by shares the board will have the power to appoint additional directors and make decisions including how cash held is invested, the distribution of profits, transfers of shares, changes to voting and share of income and capital. Importantly, the donor has these powers as a director without needing to hold voting shares which would otherwise give the shareholder value in the company potentially chargeable to IHT.
Funding for the FIC is typically in the form of cash (which can be funded via an interest-free loan); the company then acquires assets (property, cars, art, trading companies etc.) that generate a return. Income is either re-invested within the company, or used to repay the loan (alternatively the loan could be gifted/assigned to other family members where the capital value is no longer needed or into a trust). The funding need not be in cash but could be a property, for example, but there would be potential Stamp Duty Land Tax and Capital Gains Tax implications.
Any underlying capital value grows in the name of the beneficiaries. The ongoing tax position is the same as for any other company limited by shares with a corporation tax liability on any income or capital gains (currently this rate is19% but may change in the March 2021 budget).
Electric Company Cars

For 2020/21, it was possible to enjoy an electric company car as a tax-free benefit. While this will no longer be the case for 2021/22, electric and low emission cars remain a tax-efficient benefit.
How are electric cars taxed?
Under the company car tax rules, a taxable benefit arises in respect of the private use of that car. The taxable amount (the cash equivalent value) is the ‘appropriate percentage’ of the list price of the car and optional accessories, after deducting any capital contribution made by the employee up to a maximum of £5,000. The amount is proportionately reduced where the car is not available throughout the tax year, and is further reduced to reflect any contributions required for private use.
The appropriate percentage
The appropriate percentage depends on the level of the car’s CO2 emissions. For zero emission cars, regardless of whether the car was first registered on or after 6 April 2020 or before that date, the appropriate percentage for electric cars is 1% for 2021/22. For 2020/21 it was set at 0%.
This means that the tax cost of an electric company car, as illustrated by the following example, remains low in 2021/22.
Example
Jaz has an electric company car with a list price of £30,000. The car was first registered on 1 April 2020.
For 2020/21, the appropriate percentage for an electric car was 0%, meaning that Jaz was able to enjoy the benefit of the private use of the car tax-free.
For 2021/22, the appropriate percentage is 1%. Consequently, the taxable amount is £300 (1% of £30,000).
If Jaz is a higher rate taxpayer, he will only pay tax of £120 on the benefit of his company car. If he is a basic rate taxpayer, he will pay £60 in tax. This is a very good deal.
His employer will also pay Class 1A National Insurance of £41.40 (£300 @ 13.8%).
For 2022/23 the appropriate percentage will increase to 2%.
Low emission cars
If an electric car is not for you, it is still possible to have a tax efficient company car by choosing a low emission model.
The way in which CO2 emissions are measured changed from 6 April 2020. For 2020/21 and 2021/22, the appropriate percentage also depends on the date on which the car was first registered as well as its CO2 emissions. For low emission cars within the 1—50g/km band, there is a further factor to take into account – the car’s electric range (or zero emission mileage). This is the distance that the car can travel on a single charge.
The following table shows the appropriate percentages applying for low emission cars for 2021/22.
Appropriate percentage for 2021/22 for cars with CO2 emissions of 1—50g/km | ||
Electric range | Cars first registered before 6 April 2020 | Cars first registered on or after 6 April 2020 |
More than 130 miles | 2% | 1% |
70—129 miles | 5% | 4% |
40—69 miles | 8% | 7% |
30 – 39 miles | 12% | 11% |
Less than 30 miles | 14% | 13% |
As seen from the table, choosing a car with a good electric range can dramatically reduce the tax charge. Assuming a list price of £30,000, the taxable amount for a car first registered on or after 6 April 2020 with an electric range of at least 130 miles is £300 (£30,000 @ 1%); by contrast, the taxable amount for a car with the same list price first registered before 6 April 2020 with an electric range of less than 30 miles is £4,200 (£30,000 @ 14%).
The moral here is to choose a new greener model and you will be rewarded with a lower tax bill.
Time to pay

As part of the Chancellor’s Coronavirus support package taxpayers were permitted to defer payment of the July 2020 income tax Payment on Account instalment until 31 January 2021. However, three lockdowns later and HMRC have become increasingly aware that a large number of taxpayers are still needing to delay not only that payment but also the tax payments that would normally be due on 31 January 2021 namely:
- the balancing income tax payment for 2019/20,
- the first income tax payment on account for 2020/21,
- any capital gains tax for 2019/20 and
- classes 2 and 4 NIC for 2019/20.
Therefore HMRC have set up a method by which further deferment may be applied for online, separate from their usual ‘Time to Pay’ arrangements facility. Taxpayers unable to pay their tax bills would normally need to call HMRC to discuss a payment plan but this method of applying online makes the process easier.
To use this automatic process the taxpayer needs to set up a Government Gateway account and agree to pay the tax in monthly instalments by direct debit, with the aim of clearing the debt within 12 months. Other conditions include:
- the 2019/20 tax return must have already been submitted,
- the submission of all tax returns must be up to date,
- the debt must be of at least £32 but less than £30,000 and,
- no other tax instalment plans must be in place (i.e. under the usual “Time to Pay” arrangements).
Although payments are expected to be made monthly the system does allow flexibility such that the taxpayer can make additional payments should circumstances allow. However, should the arrangement need to be amended later then HMRC will need to be contacted by phone to discuss revised arrangements. The instalment plan must be set up no later than 60 days after the due date for the tax, which realistically means that it needs to be in place by 31 March 2021. All the late paid tax will accrue interest at 2.6% to the date of full repayment.
Should the taxpayer not keep to the arrangement and fall behind with the payments then HMRC has the right to ask for the outstanding amount to be repaid in full.
The facility may be a lifeline for many but it should be noted that care needs to be taken should the application include deferment of class 2 NIC due for 2019/20. The rules covering NIC payments mean that if this NIC is not paid by 31 January 2021, then the year will not count as a completed year in the taxpayer’s NIC record for state pension purposes.
Care also needs to be taken as to when to apply. Tax return submissions normally take up to 72 hours to be processed. Therefore, should the taxpayer apply at the same time as submitting their return for example, then the application may be rejected.
Should the total tax debt be more than £30,000 or the 31 March 2021 deadline is missed then the taxpayer cannot take advantage of this online facility and must go through the normal ‘Time to Pay’ process. There is also no specific online facility for corporation tax payments and as such the general ‘Time to Pay’ arrangements will need to be sought. However, it would appear that HMRC are being flexible with these arrangements and in some cases are agreeing to three months interest free extensions on payment dates.