When a business makes money, it must pay tax on those earnings through regular tax returns. This applies to businesses of all shapes and sizes.
Sole traders, for example, submit a Self Assessment tax return to pay Income Tax on what they’ve made. Limited companies send Company Tax Returns so that they can pay Corporation Tax on their profits.
But what about when no profit is made? What happens when a business is operating at a loss? In this blog post, we’ll explain how it all works to help you remain tax-compliant at all times.
Do I need to submit a tax return even if I don’t make a profit?
Yes, even if you make a loss during a financial period, you still need to send a tax return for it so that HMRC know!
Despite their sometimes-scary sounding letters, HMRC can’t actually read minds, and will assume you have tax to pay unless you submit a tax return saying otherwise.
What if my business has stopped trading?
You won’t need to submit a tax return anymore if you cease trading and de-register the business, although you will need to submit returns up until the end date of the business. This indicates to HMRC that you have no plans to make any more taxable earnings from that business in the future.
You’ll also need to make sure you de-register the business with HMRC, so they know what time period the final return for that business should cover.
Will I get any money back if my business makes a loss?
Apart from the fact that you have to, submitting a tax return to show HMRC the loss you made still has its uses.
You might be able to carry the loss back
Businesses pay tax on the profits that they make, but this amount can change from year to year – sometimes quite a lot.
If you make a profit one year and a loss the next, you might be able to carry that loss back into the previous financial period. This is good because:
- Carrying a loss back means you can offset it against those profits.
- This reduces the amount of profit in that period, which in turn reduces the amount of tax that’s due.
- If you’ve already paid your tax bill for that period, offsetting this year’s loss against it means you can claim back the difference as a rebate.
Normally restricted to the previous 12-month period, this has been temporarily extended to 3 years for:
- Losses occurring in accounting periods which end between 1 April 2020 and 31 March 2022 if you’re a limited company
- Trading losses occurring in the 2020-21 and 2021-22 tax years for unincorporated businesses, such as sole traders
Or maybe even carry the loss forward
Instead of carrying the loss back into a previous financial period, you may also have the option of carrying it forward into a future tax year.
The direction of time travel might be different here, but the principle remains the same. Carrying a loss forward means it can potentially be used to reduce next year’s upcoming tax bill, and with various rising costs, every little really does help.
So, in other words, submitting a tax return even when you’ve made a loss can be a nifty little cost-saving exercise, not just a legal obligation.
For more detailed information about carrying losses backward or forwards into alternative accounting periods, visit the government website. There are specific rules and regulations that you’ll need to be aware of if transferring a loss for tax benefits is something you plan to do.
Find more tips and advice for your business on our website, or tap into our guide on hiring the right accountant.