387 Calculation of amount of profits or gains for purposes of terminal loss

Summary

This section is concerned with the calculation of the amount of the profits/gains of the trade or profession on which the claimant has been charged to tax for a particular year and against which the terminal loss may be carried back and set against.

Details

(1) The starting point is to take the full amount of the profits/gains of the trade or profession on which the claimant was assessable for a year of assessment (that is, the gross profit of the basis year or period for that year). From this amount is deducted —

• capital allowances (including amounts carried forward from an earlier year) made in charging those profits/gains for the year concerned,
• deductions (allowed against the profits/gains assessed) in respect of losses,
• deductions allowed in computing total income for the year concerned in respect of payments made out of the profits/gains assessed, and
• in the case of a body of persons, dividends paid out of profits/gains of the trade or profession (this is, in general, not relevant).

In effect, the profits/gains on which a person has been charged to tax are those on which he/she would have ultimately borne tax were that person not entitled to any personal allowances or reliefs.

The deductions allowable in computing total income which may be treated as made from trading/professional profits or from other income are to be treated as having been made primarily from the other income. The effect of this is that such items as interest deductible under section 248 or 253 or charges on income (for example, annuities or other annual payments) are to be deducted first from non-trading/professional income. However, items such as a section 381 loss (where it is deductible first from earned income), a trading loss carried forward under section 382 or a retirement annuities premium in respect of income from a trade or profession under section 784 are deducted primarily or only from the trading profits.

(2) Where an annual payment or other payment treated as a charge is not made for trade/profession purposes, the amount of the terminal loss qualifying for relief for earlier years is to be reduced by the amount of the payment so made. The relief available for the earlier years is accordingly limited to what it would have been if the terminal loss had been set against the trading profits of the later years before deducting the payment.

Relevant Date: Finance Act 2019