ACCA Advanced Taxation (ATX) Practice Exam

How are trading losses treated for an individual running an unincorporated business?

1. They can be carried back to previous profitable years

2. They are automatically offset against the first available future profits from the same trade

3. They can only be utilized if the business is closed

4. They must be claimed in the year they occur

The correct answer is: They are automatically offset against the first available future profits from the same trade

In the context of unincorporated businesses, trading losses can be automatically offset against the first available future profits generated from the same trade. This means that if an individual incurs a loss in one tax year, they can use that loss to reduce their taxable income in future years when they are making profits from the same business. This treatment of trading losses is beneficial as it allows businesses to recuperate some of their financial losses by reducing the tax liability in subsequent profitable years. There are specific rules governing how these losses can be carried forward, and this generally applies until the losses can be fully utilized against future income from the same trade. For the other options, while they present different potential treatments of losses, they do not accurately reflect typical tax legislation for unincorporated businesses. Losses can be carried back in certain scenarios, but this is not the standard treatment unless specific election criteria are met. Similarly, claiming losses only upon business closure or requiring them to be claimed in the year they occur does not align with the flexibility provided for offsetting future profits.