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. Their results were as follows:

Year ended

Trade profit or loss before capital allowances

Year ended 31.12.14

Loss 拢3700

Year ended 31.12.15

Loss 拢1100

Year ended 31.12.16

Loss 拢4800

Year ended 31.12.17

Loss 拢7000

Year ended 31.12.18

Loss 拢2600

Year ended 31.12.19

Profit 拢1200

Year ended 31.12.20

Loss 拢4400

Year ended 31.12.21

Loss 拢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 拢1100 = L 拢814) + (95/366 x L 拢4800 = L 拢1246)

= Loss 拢2060

2016-17

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

= Loss 拢5382

2017-18

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

= Loss 拢5841

2018-19

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

= Loss 拢1611

2019-20

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

= Loss 拢254

2020-21

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

= Loss 拢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. The five year rule therefore applies and the loss incurred for the year ended 31.12.2020 of 拢4400 is not available for trade loss relief against general income.