There is a difference between a trading loss and a tax loss. There are times when you may turn in a trading profit which is converted to a tax loss by claiming capital allowance, particularly the Annual Investment Allowance. Having arrived at the tax loss there are then a number of choices.
Primarily these are:
Carry the losses forwards to set off against future profits of the trade
carry the losses sideways in the same tax year and set off against other income
or carry the losses back (how far back depends on individual circumstances).
There is a temptation to go for options 2 or 3 as there is a real opportunity to recover tax already paid and positively impact cash flow.
Unfortunately this may not be the best option. The two main circumstances when option 1 may be a better choice are set out below.Sometimes you will be required to carry losses back or sideways until all of your taxable income is covered. In some cases this may mean that you get no benefit for your personal allowance which would be wasted. An immediate set off of losses may reduce taxable earnings that were subject to basic rate tax in prior or current tax years when you may be predicting earning in forthcoming years at higher rates.
With the advent of the 50% income tax rate from 6 April 2010 and the gradual loss of personal tax allowances for high income earners, carrying losses forwards may be a better strategic choice - rather than a quick set off at lower rates use the losses in the following year.
Please note that the comments above are a simplification of a complex process. If you are presently in a loss making position but can see profitable times ahead, careful tax planning to maximise the benefit of the losses is essential - give us a call.