Did You Know That a Trading Loss in Your First Year Could Refund Years of Tax?

Early Trade Loss Relief under s.72 ITA 2007: the start-up relief most new business owners never claim.

ITA 2007, ss.72-74 | HMRC BIM85045 | HS227 Losses (2025)

Starting a business is an act of courage. The early years demand everything. Time, capital, attention, and more often than not, the first trading periods produce losses rather than profits.

Most people treat those losses as setbacks. What they do not realise is that HMRC has a specific provision designed precisely for this moment. Under s.72 of the Income Tax Act 2007 (ITA 2007), a trading loss made in the first four tax years of a business can be carried back against your personal income from the three years before you even started trading. That means tax you paid as an employee, a director, or from any other source could be refunded, simply because you took the risk of starting something new.

For many businesses, this relief is most valuable in the early years of trading. However, it is only available for qualifying expenditure incurred within the first four years, making it important to identify and claim eligible costs while that window remains open.

What Is Early Trade Loss Relief?

Early trade loss relief is the mechanism provided under ss.72-74 ITA 2007 (the Income Tax Act 2007) that allows a newly trading individual to carry a trading loss back against their net income (total income from all sources, before personal allowance) of the three tax years that preceded the loss-making year.

This relief is exclusive to the opening phase of a business. It recognises that new ventures often require significant investment before revenue materialises, and that the tax system should allow those early-stage losses to interact with income earned before the business began.

ITA 2007, ss.72-74

The Four-Year Window: How Long Do You Have?

The relief under s.72 ITA 2007 is available for losses arising in the first four tax years in which a trade is carried on. This is not four calendar years from formation, it is four consecutive tax years (each running from 6 April to 5 April).

If a trade commences on 1 January 2024, it begins in tax year 2023/24 (which runs from 6 April 2023 to 5 April 2024). Early trade loss relief is available for losses made in each of the following four tax years: 2023/24, 2024/25, 2025/26 and 2026/27.

Once the four-year window closes, this specific route is not available. Any unrelieved losses after Year 4 can only be carried forward under s.83 ITA 2007 against future profits of the same trade, a less immediate form of relief.

ITA 2007, s.72(1) – applies to losses made in first four tax years of a trade

How the Carry-Back Works: The Direction Matters

When a claim is made under s.72, the loss is carried back against the net income of the three tax years immediately preceding the loss year. The critical point is that the loss must be applied to the earliest year first before any remaining balance can be carried forward to later years.

As the ordering rules can affect both the amount and timing of tax relief obtained, it is worth checking that any claim has been applied correctly and that it was appropriate for your particular circumstances. If you are unsure, speak to your accountant or seek professional advice to confirm that the most beneficial treatment has been used.

Under s.72, you go backwards in time, earliest year first. Under s.89 (terminal losses), you start with the most recent year. The direction determines how much income you protect in which year.

There is no relief against the income of the loss-making tax year itself under s.72. The claim is purely retrospective.

The all-or-nothing rule: once a claim is made for a given year, the full amount available must be set against all of that year’s income before moving to the next year. You cannot choose to offset only part of a year’s income to preserve a personal allowance (the tax-free amount of income, currently £12,570).

ITA 2007, s.72(2) – carry-back against net income, earlier years first

Worked Example: Tom, Freelance Web Developer

Tom left employment on 31 March 2023 and launched his web development business on 1 April 2023. He draws accounts to 31 March each year. In the first year of trading (year ended 31 March 2024, which falls in tax year 2023/24), Tom makes a trading loss of £42,000.

Before starting his business, Tom was employed and had net income of £28,000 in each of the three preceding tax years. He has no other income. Tom claims early trade loss relief under s.72 ITA 2007 for his 2023/24 loss.

The loss of £42,000 is applied to 2020/21 first. The full £28,000 of net income in 2020/21 is wiped to nil, with £14,000 of the loss remaining. In 2021/22, the remaining £14,000 is offset, reducing that year’s revised net income to £14,000. The loss is now exhausted. The 2022/23 income is untouched.

The practical result: Tom will receive a tax repayment (a refund of income tax paid) for 2020/21 and a reduction in his 2021/22 tax liability. The earlier the income was taxed at a higher rate, the more valuable the repayment.

Note: Tax bands and rates used in the carry-back years are those of the original year, not the current year.

Checking the Income Tax Reliefs Restriction (s.24A)

Before claiming, it is important to check whether the annual income tax reliefs cap applies. Under s.24A ITA 2007, the total amount of income tax reliefs that can be deducted from total income in a single tax year is limited to the greater of:

• £50,000, and
• 25% of the individual’s adjusted total income (total income before certain deductions)

In Tom’s case, his net income in each prior year is £28,000. The restriction limit is the greater of £50,000 and 25% of £28,000, which is £7,000. The limit is therefore £50,000.

Tom’s loss of £42,000 is below £50,000. There is no restriction. The full loss is relievable in the priority years.

However, a new business making a very large early loss (say £80,000) would need to consider this restriction carefully in each of the three carry-back years, especially if income in those years was below £200,000 (the threshold above which the £50,000 cap is less likely to bite).

ITA 2007, s.24A – see also HMRC Helpsheet HS204 (Limit on Income Tax Reliefs)

No Extension to Capital Gains (Unlike s.64)

A common point of confusion: s.72 ITA 2007 cannot be extended to offset against capital gains in the carry-back years. This is in contrast to s.64 ITA 2007 (relief against net income of the same or preceding year), which can be extended to chargeable gains under s.71 ITA 2007.

Under s.72, the relief is strictly against net income. If a taxpayer has significant capital gains in the carry-back years but limited income, the s.72 route may deliver less value than a s.64 claim for the same year. This is one of the planning considerations covered in the article for Subject 11B.

ITA 2007, s.72 – no equivalent of s.71 extension for early trade losses

Claim Deadline: Do Not Miss It

The time limit for making a s.72 claim is the first anniversary of 31 January following the end of the tax year in which the loss was made. In plain terms:

This is the same deadline that applies to s.64 loss relief claims. Miss it and the option to carry back is lost. The loss can still be carried forward under s.83, but the ability to generate a refund of tax from prior years disappears.

ITA 2007, s.72 – claim by first anniversary of 31 January following end of loss year

What Makes a Trade Eligible?

Not all early losses automatically qualify. The trade must be carried on on a commercial basis throughout the tax year, meaning with a reasonable expectation of profit. HMRC may challenge losses under s.74 ITA 2007 where a trade does not appear to be run commercially, for example a hobby being structured as a trade purely to generate loss relief.

Additionally, s.72 losses cannot be claimed for losses computed on a cash basis (the simplified accounting method) for tax years 2013-14 to 2023-24. This restriction has been relaxed from 2024-25 onwards following the reform of the cash basis rules, but the position should be checked where a business has opted to use cash basis in earlier years.

ITA 2007, s.74 – commercial basis requirement for early trade loss relief

Starting a business in the face of uncertainty takes more courage than most people realise. The early-stage losses are not proof that the venture is failing. They are often proof that it is being built with the right ambitions: investing in infrastructure, people, and capability before the revenue curve catches up.

HMRC recognises this reality in the tax code. The relief exists because the system is designed to support genuine commercial risk-taking. Claiming it is not just a tax strategy. It is using a mechanism that was written for exactly the situation you are in.

What to Do Next

If you started trading in the last four tax years and have made losses, a s.72 claim may be available to you. This is not a standard item on a basic tax return, it requires a specific claim, accurate loss calculations, and careful application to the correct prior years.

At Zazentax, we review loss positions as a standard part of our onboarding for new and early-stage businesses. We calculate the optimal carry-back, check restriction limits, and file claims to the correct deadline.

Explore our service packages: www.zazentax.com

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