Carrying Back Opening Year Losses

[stephenballantyne]

Hi,
This is my first query on here, so hello!

I think my accountant might have missed a trick on my previous years' tax returns, but I wondered if anyone could offer some advice? I've just started a business with my partner, into which we invested a lot of money from Oct 2017 to July 2019. Therefore, in its first two tax returns it had high capital allowances and net trading losses. In 2017/18 and the years before, I was a higher rate tax payer on PAYE and I earned a smaller amount of PAYE income in 2018/19.

What my accountant has done:
2017/18 - Taken a full £24k loss in the year (£22k of which is capital allowances expensed @ 100%) to offset income earned at the higher rate
2018/19 - Taken £13k of a total £20k loss (£16.5k of which is capital allowances expensed @ 18%) to offset PAYE income earned and to leave net earnings = £11,850. Carried forward £7k loss and a large amount of capital allowances

My questions:
1) Is what they have done OK? I was under the impression that losses had to be utilised in full, so should any of the 2018/19 loss have been carried forward? Also, the treatment of taking 100% capital allowances in 2017/18 and only 18% in 2018/19 seems odd to me.
2) Could they have used the 2018/19 loss to offset an earlier tax year instead where I paid higher rate tax?
3) If the answer to (2) is yes, can I resumbit my returns to change this? Including resubmitting 2017/18 presumably.
4) If I can't / don't want to resubmit, can I at least use the £7k carried forward loss to offset earlier year tax? And if so, how can I do this?

Many thanks in advance,
Steve

[robbob]

What my accountant has done:
2017/18 - Taken a full £24k loss in the year (£22k of which is capital allowances expensed @ 100%) to offset income earned at the higher rate
2018/19 - Taken £13k of a total £20k loss (£16.5k of which is capital allowances expensed @ 18%) to offset PAYE income earned and to leave net earnings = £11,850. Carried forward £7k loss and a large amount of capital allowances
My questions:
1) Is what they have done OK? I was under the impression that losses had to be utilised in full, so should any of the 2018/19 loss have been carried forward? Also, the treatment of taking 100% capital allowances in 2017/18 and only 18% in 2018/19 seems odd to me.
2) Could they have used the 2018/19 loss to offset an earlier tax year instead where I paid higher rate tax?
3) If the answer to (2) is yes, can I resumbit my returns to change this? Including resubmitting 2017/18 presumably.
4) If I can't / don't want to resubmit, can I at least use the £7k carried forward loss to offset earlier year tax? And if so, how can I do this?

1 - not enough information to answer your question however carrying back losses is not always in your best interests due to the use it or lose it principle - when you use it (the amount you carry back) you must use it in full against that years income before moving the same claim for carry back onto the next year so you can't always carry back portions to mutliple years simply to scoop up the 40% or 20% relief without wasting some carry back.

2) Could they have used the 2018/19 loss to offset an earlier tax year instead where I paid higher rate tax?

Yes presuming you have paid tax in the earlier year - note its not a given that this would have benefited you though !- normally its prior year losses - or the slightly more complicated "May be set off against total income in the preceding three tax years, prior to the tax year of loss on a first-in, first-out (FIFO) basis"

https://www.accaglobal.com/ca/en/technical-activities/technical-resources-search/2014/january/using-trading-losses.html

You may realise looking at this the answer is not simplistic but witha bit of head scratching AND advance planning it is normally best to come up with something approaching the best solution - note its possible that doing the wrong thing in 2018 with the benefoit of hindsight fo what the 2019 figures are could have knock on effect with regard to the 2019 calcs. HMRC do provide period under which returns can be amended.

Don't afraid to be blunt with your accountant and ask the probing questions , if they did not ask (or find out form hmrc directly) income details ref 3 earlier years and defaulted to non higher rate relief that may suggest not all options have been looked at if its rreasonably obvious there was higher rate relief available. There is also an element of choosing the correct accounts year end and waiving capital allowances sometimes that may help.

3) If the answer to (2) is yes, can I resumbit my returns to change this? Including resubmitting 2017/18 presumably.

No - dealine for 17/18 amendement is 31/1/2020 ref loss relief - note that deadline does give you the benefit of hindsight as the 2018 calculations can be revisted at the same time as doing the 2019 calcs (as long as those are not late)

Time limits for making loss relief claims
In all cases, a claim for loss relief must be made by the one-year anniversary of the normal filing date of the tax return for the loss-making year, eg a claim for 2012/13 losses would need to made by 31 January 2015.

4) If I can't / don't want to resubmit, can I at least use the £7k carried forward loss to offset earlier year tax? And if so, how can I do this?

- it doesn't work like that carried forward losses would need to be set against 19/20 or possibly later years profits - as long as you are paying tax at time loss is used it won't be wasted. If it's know you will be well into higher rate tax 19/20 onwards it may be beneficial or minimilistic overall loss doing what has been done compared to misisng out on higher rate refund due to carry back.

I would have sympathy for your accountant if you provided them with informtation close to filing deadline exepecting quick turnaround - eg turning up 24th january expecting your accountant to work their magic in 7 days


Note if your business is progressing nicely profits wise and you will be looking to swap to limited company there are similar tax mitigation planning options available - so if the accountant turns out not be be procative and or you are not proactive in sitting down and giving the accountant heads up of where profits are going it may be time to turn on the proactivity boost.

[stephenballantyne]

Thanks for your reply!

The point about not being able to amend my 17/18 return now worries me given that I gave my accountant chapter and verse on my situation (I'm a management accountant by training, so I know how to put together figures) and the returns were submitted in Aug 2019.

Would you mind if I sent you a PM with more detail just to clarify?

Thanks again,
Steve