Class 4 and losses

[johnfkavanagh]

I have to confess that it is a long time since I came across this situation in practice but I do not think that the legislation is at all ambiguous, even if the publication referred to is.

SSCBA 1992, Schedule 2, Paragraph (3)(1) provides that "relief shall be available under, and in the manner provided by, the folowing provisions of [ICTA 1988] -

(a) sections 380 and 381 (set-off of trade losses against general income), but only where loss arises from activities the profits or gains of which would be brought into computation for the purposes of Class 4 computations;
(b) [repealed]
(c) section 385 (carry forward of loss against subsequent profits)
(d) sections 388 and 389 (carry-back of terminal losses)..."

Paragraph 3(4)(a) goes on to say that a loss from a relevant trade (i.e. a trade within the charge to Class 4) "...shall, as far as may be, be treated for the purpose of the charge to Class 4 contributions as reducing the person's profits or gains for that year of any relevant trade, profession or vocation"

In other words, the legislation certainly does not forbid a loss from one trade being set against a profit from another in the same year for Class 4 NIC purposes. Paragraph 3(5) also has the effect of ensuring that losses which have been used against non-trading income for tax purposes are still available to be carried forward and set against future trading income for Class 4 purposes.

John Kavanagh
UK Tax Consulting Ltd
Chartered Tax Advisers
www.uktaxconsulting.co.uk
mail@uktaxconsulting.com
Tel: 020 7060 1660
Fax: 020 7060 1663

[King_Maker]

John,

That's the way I have been reading it.

[dagreensta]

Well I'm completely undecided now. I'm going to give the Revenue and try to get through to a Band D technician who could confirm what John has stated.

[Instinctive]

Dagreensta,
Now it is my question to raise a query. What is a Band D technician? Is this some kind of a music band? Just joking.

If I were you, I would just claim the loss for income tax as well as for NIC4 against the profits of the other trade. If you wish to be on the safe side, just explain in the 'additional box' on self-employment pages of your self assessment tax return what you have done. This way you are placing all your cards face up.

Ramnik

[johnfkavanagh]

Ramnik

I am out of touch with these things but I believe that Band D is the clerical rank in HMRC (as we must now learn to call them!) just below the lowest grade of Inspector.

The fount of all tax knowledge, then...

John

[deanshepherd]

Ok, back to the original queation..

1) Sage Taxation suite does not allow you to set the loss off for Class 4 purposes (with good reason) so if you are going to do so you will need to get the tippex out!

2) The Inland Revenue (surprisingly) have their own tax software and as soon as your return is processed they will recalculate your Class 4 NIC to what it should be and send you their calculation anyway.

A number of my clients have been in this situation.

Dean Shepherd
dean@mmi-online.co.uk
www.mmi-online.co.uk

[johnfkavanagh]

Dean

I am sure that there is a good reason why Sage Taxation Suite doesn't do the calculation - it hasn't been programmed to do it. There are many relatively obscure situations which the proprietary software does not attempt to deal with precisely because they are obscure. Why you or anybody else would think that what Sage Taxation Suite or any other tax software (including the Revenue's) does or does not do should override what is there in black and white in the legislation is completely beyond me. Neither is the say-so of a Band D (or any other band) technician going to change anything.

I don't mean to be rude, but if you are going to make confident assertions about something (and especially if you are going to contradict the reasoned views of other contributors), you should at least back it up with better authority than software glitches!

With respect, I think that you are completely wrong about this and perhaps you ought to look at your clients' Class 4 calculations again.

John Kavanagh

[dagreensta]

Just one point I'd like to raise on that John - I was always under the impression that software like Sage Taxation Suite had to seek approval from the Revenue in order to be released as a 'tax solution'. You would think (or hope) that somebody would have checked this type of situation as it is no entirely uncommon.

[johnfkavanagh]

I think that you will find that the Revenue's "approval" only extends to whether the forms produced by the software are acceptable substitutes to the official forms and that software used for e-filing is compatible with the Inland revenue's systems. As far as I know, the Revenue does not check software developers' work for any other bugs or technical inaccuracies - it would be surprising if they did. I think they (quite reasonably) take the view that if software is inaccurate or inadequate in some respect other than compatibility with the Revenue's systems or requirements, that is a matter between Sage (or whoever) and their users.

John Kavanagh

[johnfkavanagh]

Dagreensta

Just out of curiosity I tried this out with a dummy client on PTP to see if it would do this better than Sage without user intervention, and guess what? It didn't work either.

As Dean says, let's get back to the original question, preferably with a correct answer this time. I stand by the answer I gave before but if you want step by step instructions on how to deal with your precise problem, i.e. completing the form to give effect to the loss relief claim for Class 4 NIC purposes, you need to take a look at the Inland Revenue Help Sheet IR220 ("More than one business"). You can find it at:

http://www.hmrc.gov.uk/helpsheets/ir220.pdf

In the section headed ""Calculating adjustments to profit chargeable to Class 4 NIC due (if you have more than one business)", there is an explanation and a worksheet which shows you exactly how to make the necessary adjustment entry on the self-employment schedule and tax calculation working sheets.

This should solve your problem. Try it and if you are not completely satisfied, come back to the forum!

John Kavanagh