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Preserving an assessed tax loss

A “tax year” (also called a “year of assessment") runs from 1 March in one year to the last day of February in the following year.

As a general principle, our income tax system operates on a strict year-by-year basis, in which a person’s taxable income is determined for each tax year in isolation. Each item of income and each item of deductible expenditure must be brought into account in the particular tax year to which it belongs.

An important exception to this rule is that, if a taxpayer (whether an individual or a company) makes a tax loss in year 1, the taxpayer is allowed to carry that loss forward into the following tax year and the tax years after that, until the loss has been fully absorbed by income.

Paradoxically, therefore, an assessed tax loss is a valuable asset, for until it has been fully offset by income, the taxpayer will pay no income tax.

However, if the taxpayer is a company and if it fails to trade (ie carry on business) for the whole of the tax year, any assessed loss brought forward from the previous year is totally and permanently forfeited. This rule does not apply to taxpayers who are individuals. Individuals therefore do not forfeit an assessed tax loss brought forward from a previous year if they fail to trade during the current tax year.

From a tax-planning point of view, therefore, it is important to ensure that a company which has an assessed loss brought forward from a prior tax year carries on some trading activity during the current tax year and that it derives some income from that trade. There are various ways in which the company can legitimately arrange its affairs to ensure that there is sufficient trading activity and sufficient income to keep that valuable assessed loss alive.

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