Trading Losses and NIC

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Trading losses and NICs Ken Voller explains the interaction of trading losses and NICs

Trading losses This article is only concerned with trading losses for self-employed traders and professionals. I am not discussing here any other type of loss or considering the effect on people other than self-employed traders and professionals. Unfortunately, business being what it is, and aggravated by a general downturn in the economy, some businesses will make losses. The point is what can we do with those losses to lessen the pain and hopefully continue on into a brighter, more profitable, future? Because unsuccessful businesses do not generally last any particular length of time, either because of a sad demise or a turnaround in fortunes, it can sometimes be several years between having to consider the rules for losses and, for quite a number of advisors that I know, the rules were last looked at when they underwent their professional body entrance examinations! Clearly, the same can be true for HMRC staff who, in many instances, rely on the professional advisors to make appropriate entries onto Self-Assessment Tax Returns. The bit that seems to be most commonly forgotten by advisors and HMRC alike is that losses for NIC purposes are not necessarily the same as those for tax purposes. However, like most NIC matters, the basic rules are initially instigated from the tax rules. Accordingly, it is worth describing the tax rules first. Tax rules The rules for losses and Class 4 NICs have not changed since 1994 when the basic loss provisions (for Income Tax purposes) were revised (Finance Act 1994) to coincide with the change in basis of assessment of Schedule D Case I and II profits (ICTA 1988 s 18) for unincorporated businesses. Since then, we have lost contact with the scheduler system with the move to Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) and the Income Tax Act 2007 (ITA 2007). Hence the tax loss rules are no longer found in ICTA 1988 but are now in Part 4 of ITA 2007: ITA 2007

ICTA 1988

s64

s380

Losses of a year of assessment available against income of that year or income of the proceeding year.

s72

s381

Relief for losses arising in early years of trade.

s83

s385

Carry-forward of losses not claimed under any other provision.

s86

s386

Carry-forward of losses where the trade has been incorporated.

s89

s388

Losses arising in the final year of trading.

NIC rules When we come to look at the rules for Class 4 NIC purposes the legislation is contained in Schedule 2 of the Social Security Contributions and Benefits Act (SSCBA) 1992. The NIC rules are neatly organised and paragraph 3 of the Schedule confirms the tax loss legislation that applies for NIC purposes. Interestingly, despite continuing promises of ‘harmonisation’, the original NIC legislation still refers to the ICTA 1988 rules! Although ITTOIA 2005 and ITA 2007 did insert amendments to SSCBA 1992, I feel that a complete rewrite would be useful. In many instances the tax and NIC rules will mirror each other but Schedule 2 confirms which parts of the tax legislation do not apply for NIC purposes. Perhaps it is not totally surprising how quickly the rules can produce differing calculations.


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