ACCA Advanced Taxation (ATX) Practice Exam

Which of the following statements is true regarding loss relief for individuals?

1. Losses from one trade can offset gains from another

2. Losses must be carried back to the previous year before forward

3. Losses cannot be claimed against income

4. Losses can only be carried forward within the same trade

The correct answer is: Losses can only be carried forward within the same trade

The statement that losses can only be carried forward within the same trade is true in the context of loss relief for individuals. This means that if an individual incurs a loss in a particular trade or business, they can use that loss to offset future profits arising from the same trade. This is particularly important for individuals who may have fluctuations in their income from year to year, as it allows them to manage their tax liabilities over time. Carrying losses forward helps individuals utilize losses when they generate profits in subsequent years, thereby reducing their overall taxable income. This mechanism is designed to assist taxpayers in situations where they may experience temporary downturns in their business activities. Understanding this aspect of tax relief is crucial because it highlights the importance of aligning losses with the appropriate sources of income, reinforcing the idea that tax relief mechanisms are structured to support individuals in the continuity of their business activities, while preventing the offset of losses broadly across different trades or sources of income.