Tax Help for Losses and Falling Sales

If your sales have dropped and costs have risen, you may be making a loss. This is not a disaster, but you should take action soon to get the best out of the tax system at this difficult time.

VAT

Where your turnover for the last 12 months has dropped below £70,000 you could deregister for VAT. This will not suit all businesses, but if you sell to the public you may gain a competitive advantage by being outside the VAT net.

Loss Claims

Once you have a definite loss figure from your accounts you can set this against your profits for the previous year to generate a tax repayment or tax reduction. If the current loss exceeds the previous year's profits you may be able to carry the excess back a further two years, but this depends on when your loss making period ended. You may need to change your accounting period slightly to accelerate the loss relief available.

Tax and Pension Credits

If your business is your main source of income, a loss means you may be eligible to receive Tax Credits. Tax credits are particularly valuable for families with children under the age of 16 or who are in full-time education, but single individuals can also claim. Your claim can only be backdated up to three months, so you need to make sure you don't delay making a claim. If you are aged 60 or over you may be able to claim Pension Credit. You don't have to be retired to claim this support and it is a much simpler system than Tax Credits.

However your trading loss arose, the best policy is to make sure you act quickly to reduce the business tax payments and generate tax refunds. The worst thing you can do is put your head in the sand!

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Traps in the VAT Flat Rate Scheme

The Taxman likes to encourage small businesses to join the flat rate VAT scheme. This scheme simplifies your VAT return as you apply the relevant flat percentage applicable for your trade sector to all your total business income each quarter, (including the VAT charged), and pay the resulting amount as VAT to the Taxman as VAT. You don't have to worry about reclaiming VAT charged on purchases.

However, the flat rate VAT scheme does not suit all small businesses. The flat rate must be applied to all business income, including interest received from business bank accounts, rents, and sales of assets where VAT was not reclaimed, such as cars or property. This means you effectively pay VAT on the gross receipts of sales on which you have not collected any VAT.

If you are a sole-trader the flat rate should be applied to any letting income you receive in your sole name, as lettings are regarded as a business for VAT purposes. Lettings undertaken as a partnership, perhaps jointly with your spouse, are not counted as part of your sole-trader business income. When you sell a let property the flat rate should be applied to the total proceeds. You can withdraw from the flat rate scheme before you sell a high value item such as a property, but you have to stay out of the scheme for at least 12 months.

If you would like to discuss the flat scheme in further detail, or if you would like us to check you are using the correct flat rate for your sector, please contact us on 0800 0988 144.

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