Reducing redundancy tax bill through trade losses ?

[northeast]

Hi

I am really hoping I can get a little help and would like to say thank you in advance for any assistance.

We had a post office business which closed under the govt compensation scheme. My husband received £80,000 compensation which HMRC classed as a redundancy payment. (That is a different argument which I won't go into here but clearly, unlike normal redundancy, it was not all income. We had to pay redundancy to 4 staff, clear a large business overdraft and pay shop rent for many months until a new tenant could be found etc)
In any event, our accountant said the first £30k of the redundancy is tax free but that leaves a lot of taxable income- some at higher rate.
We didn't close our business when the post office part closed. We had to pay rent anyway - so we kept the retail side open part time, held one-day sales and sold on ebay etc to try to sell our remaining stock.

We have now done our accounts and we made a loss in the tax year upto april 2013 of around £17000- including rent, utilities etc.. This was the same tax year the redundancy was paid.
Our accounts show we made an adjusted loss of £8000 the previous year of trading too. The previous year we made an adjusted profit of £1000 so my husband didn't use all of his tax allowance.
Our accountant at the time said the redundancy was totally separate and we could not offset any business losses but I have looked at a number of sites which say losses can be set against any other income including employed income.
Unfortunately we are really struggling financially so I can't go to our accountant. Can anyone confirm that we can offset losses against the outstanding tax we owe on the redundancy payment? We have very little income now. We are worried HMRC will make us sell our home to pay the tax on the redundancy payment and we can't sleep because of the worry!
My husband believes that if we try to use these losses to mitigate the income tax, HMRC will say the £30,000 allowance couldn't also apply so we would simply be losing the £30k allowance on the redundancy and replacing it with the losses?
Many thanks for any information. We would really appreciate any advice.

 

[Bob]

The taxation of closure payments made to sub-postmasters is a complicated area. I am now retired so not up to date
Guidance is here. Cases have been heard before the High Court but I believe that HMRC have won in most cases.
Your accountant should have given you guidance. I would have imagined that a loss on cessation should have been available to offset against the income assessable on the surplus payment over the exempt amount. It would have been available against the income and not the tax but should have reduced the tax. However you apparently didn't cease and we don't know the basis on which your husbands profits and salary were assessed. Neither do we know the basis periods.
Unfortunately, I believe that you do need professional advice and maybe someone more knowledgeable than I will respond.
If not, try the CAB as most CABs do have local accountants who will assist without charge if you fulfil the CAB criteria
Good luck anyway

 

[faradaykeynes]

Here is detail guidance on trade losses off set , http://www.hmrc.gov.uk/agents/toolkits/income-tax-losses.pdf

Your 30k redundancy should be exempt, balance can be off set against current year trade losses, any thing left over will be taxable income for the year

 

[Bob]

The exemption for £30K that is not taxable is a statutory exemption and you are due to receive that relief. Have you submitted your self assessment tax return? How have the losses been dealt with in that return?

 

[northeast]

Thank you both so much for your help. We have not filed the SA since the redundancy pay was received just after the start of tax year 12/13 and SA is due at the end of this week.
We have now closed the business/ ceased trading- a new tenanthas finally taken over the shop lease but we paid rent upto dec 2013. Our accounting period is oct 1-sept 30 so the business accounts we report this week will cover oct 2011/sept 2012 and our SA will include the redundancy payment which was received in, 2012.
If we can indeed claim our trading loss of £17000 and previous year's loss of £8000 against the redundancy, does this mean it would reduce our tax liability on the redundancy pay from around £15k to £3000 - or is that totally wrong? It would mean a huge difference to us if so!
Thank you again - I really do appreciate your time.

 

[faradaykeynes]

Trading loss for this year only can be offset against this year's other income not last year. Next year when you do your final SA return you can look into terminal loss relief which is set off of terminal losses against profits of the same trade of the final tax year and the previous three years,with relief given for later years first. Why was last year trade loss not set off against last year's other income or even previous year?

Any loss this year can be carried back if there is income to net off but last year's loss will take priority in net off

 

[northeast]

Sorry,
I am a little confused.

. Why was last year trade loss not set off against last year's other income or even previous year?
We haven't filed accounts yet covering the period when we had £17000 loss- that will be in our SA filed this week, along with the paye incme ( redundancy pay).

 

[faradaykeynes]

Where trade losses are brought forward from earlier years, they must be used in full against the first available profits arising from the same trade. There is no provision for a smaller amount to be relieved or for the loss to be set against general income or profit from another trade. For example a self-employed builder who also has a retail business cannot have losses brought forward from one business set against the profits of the other.

 

[Bob]

To be honest northeast, you will only get a very general answer here . Unfortunately this is something that should have been discussed with your accountant and we do not have all the information that would be necessary to give you a detailed response. As I said earlier you do need to speak to an accountant who can advise you whether there is a way that your accounting basis periods can be adjusted so that the loss is available to offset against the closure payment. You need the loss arising from the redundancy payments are other closure costs that you incurred to be allowable in the same year that the closure payment was made. An accountant in possession of all the facts should be able to advise you whether a terminal loss relief claim can be made

 

[northeast]

Again,
Thank you both so much for taking the time to help. We have spoken to our accountant to explain that we can't pay their bill quickly and made an arrangement for payments by instalments so that they can sort it out for us. From a brief phone conversation, they confirmed the info you have given and suggested that the actual tax liability should be much reduced. It is such a weight off my mind.

Now I need to work on trying to arrange our interest-only remortgage. It's not often that we turn out to be a couple of years too young for something these days but apparently because we don't hit 60 for another three years we are unlikely to raise enough through a retirement mortgage. We have a lot of equity in the property and only seven years left on our mortgage so have LTV of about 30%. So if anyone knows of anywhere still doing interest-only where they will accept downsizing/sale of the property as the repayment vehicle, please let me know The only ones we have found so far still require proof of income.
Again, sincere thanks

 

[Bob]

@tony84 who is a regular on here comes highly recommended as a mortgage broker. Might be worth your while sending him a PM

 

[northeast]

Thank you Bob - I will certainly do that.

Regards
Susan

 

[tony84]

Thanks Bob.

I will reply here (although please feel free to PM if you wish).

Getting an Interest only mortgage in the current climate is difficult. The majority of the lenders have pulled out of that market, there are still a handful available though.

However, you will still need to evidence income. An interest only mortgage still has monthly repayments which have to be made, if you can not evidence how you can make these repayments each month then there are no lenders who will be prepared/able to accept it.