Loss is the term used when business income is less than business expenses.
Many businesses make a loss in the first year of trading due to a number of factors.
Any start up costs and pre trade expenses are added to the first year of trading. This can date back up to 6 years for sole-traders.
This might include, marketing, stationary, tools, equipment, machinery, textiles, materials and more.
When a business starts it will likely already be at a loss.
HMRC advises to register self employed when more than £1,000 have earned.
However, registration can be done at any point and any loss carried forward, backward or offset against other taxable income.
Submitting a loss has its advantages.
- Reduce tax to pay from other income
- Reduce future tax payable on business income
- Can be carried back to offset against previous tax years
- Reports that the business is officially open for business, and a UTR is issued.
It might seem strange when a loss is made, but ensuring to record all expenses, will mean only tax due is paid and no more.
It takes time to grow a business. It doesn’t happen over night.
Nobody sets out to make a loss but everyone should understand it is part of the process.
Having a strategic business plan will help ensure that any losses during business operations are budgeted for.
A good bookkeeper or accountant can help business owners plan and prepare for every eventuality.
Bookkeeping Terms A to Z 