BIM85630 - Farming losses: loss considered is loss incurred in year to 5 April

S67, S70 Income Tax Act 2007

In determining for the purpose of the five year test whether a loss was incurred in any particular tax year, the period to be taken is the year to 5 April. Where accounts are made up to a date other than 5 April, it may therefore be necessary to apportion the results of different periods of account.

Example

Starskie has traded as a farmer since 2010 and makes up their accounts annually to 31 December. »Ê¹ÚÌåÓýappir results were as follows:

Year ended

Trade profit or loss before capital allowances

Year ended 31.12.14

Loss £3700

Year ended 31.12.15

Loss £1100

Year ended 31.12.16

Loss £4800

Year ended 31.12.17

Loss £7000

Year ended 31.12.18

Loss £2600

Year ended 31.12.19

Profit £1200

Year ended 31.12.20

Loss £4400

Year ended 31.12.21

Loss £5300

Starskie claims trade loss relief against general income for 2020-21. At first sight it may appear that the five year rule does not apply as they made a profit in the year ended 31 December 2019. A different picture emerges however when profits or losses are computed by reference to tax years.

Tax year

-

Losses

2015-16

(270/365 x L £1100 = L £814) + (95/366 x L £4800 = L £1246)

= Loss £2060

2016-17

(270/366 x L £4800 = L £3541) + (96/365 x L £7000 = L £1841)

= Loss £5382

2017-18

(270/365 x L £7000 = L £5164) + (95/365 x L £2600 = L £677)

= Loss £5841

2018-19

(270/365 x L £2600 = L £1923) + (95/365 x P £1200 = P £312)

= Loss £1611

2019-20

(270/365 x P £1200 = P £888) + (95/366 x L £4400 = L £1142)

= Loss £254

2020-21

(270/366 x L £4400 = L £3246) + (96/365 x L £5300 = L £1394)

= Loss £4640

We can now see that they made a trading loss, computed without regard to capital allowances, in each of the five preceding tax years. »Ê¹ÚÌåÓýapp five year rule therefore applies and the loss incurred for the year ended 31.12.2020 of £4400 is not available for trade loss relief against general income.