The concept of "brought forward" relates directly to the management of financial losses within the framework of tax accounting. It's a strategy used both by sole traders and limited companies to optimize tax efficiency across different tax years.
Carrying Forward vs. Brought Forward
To grasp the idea of "brought forward," it's essential to compare it with "carrying forward":
- Carrying Forward: This involves transferring any financial profit or loss from the end of one accounting page (or year) to the next. It's about extending the impact of this year's financial outcomes into the next tax year.
- Brought Forward: Conversely, this term refers to importing the previous year's financial results (especially losses) into the current accounting page (or year). Essentially, it's the continuation of last year's financial narrative into the current year's ledger.
Purpose of Bringing Forward Losses
The primary aim of bringing forward losses is to ensure tax efficiency. By applying last year's losses against this year's profits, businesses can reduce their taxable income, leading to lower tax liabilities. For example:
- Loss in 2022/23: £5,000
- Profit in 2023/24: £40,000
- Taxable Profit after Bringing Forward Loss: £35,000
This strategy minimizes the amount of tax payable by effectively reducing the profit figure with the previous year's losses. However, since 2017, regulations stipulate that losses can only be applied against profits from the same trade, necessitating clear separation in record-keeping for different periods:
- Before 1st April 2021
- On or after 1st April 2021
Types of Losses That Can Be Brought Forward
Several types of financial losses can be utilized in this manner, including:
- Capital Losses: Losses from the sale or disposal of capital assets that are less than their purchase price.
- UK Property Business Losses: Losses incurred in the operation of UK-based property businesses.
- Trading Losses: Losses from the business's trading activities.
Each of these loss types can be claimed on your tax return, offering a route to manage and potentially reduce future tax liabilities through strategic financial planning and record-keeping.
