make a loss

Making a loss in your business – is it OK?

Kirsty Young Business Growth, Tax

Many new entrepreneurs worry about making a loss in their first year or so.

Many others have heard it’s normal to make losses early.

So is it OK for your business to make a loss?

We share some thoughts based on our experiences of working with hundreds of small business start-ups over the years.


Should I make a loss in my first few years?

This is a common myth that every start-up makes a loss to begin with. In our experience, there is absolutely no reason to make a loss in the first few years. In fact, it makes no sense!

    • If you are developing a product or service with a lot of upfront costs, then it’s likely you could make a loss in those early years.
    • Often large businesses, or start ups with big ambitions, will raise funding to build the business and develop, knowing they will make losses as part of this.

In the small business start up world, however, this isn’t the norm. Most owners we work with will make a profit – or at least be trying hard to!

Without getting too technical, it is also possible you might spend out a lot of money, but not actually make a loss for tax purposes. An example of this would be if you were only buying stock ready to sell at a later date. This cost is basically held until later and then ‘matched’ against your income when you sell the product.


Is making a loss good for tax purposes?

The short answer is, it’s not normally bad for tax purposes!

  • If you are self employed (i.e. not a limited company) and have another job, making a loss can actually generate you a tax refund in the right circumstances. For example, you could get a refund if you are paying tax in an employed job alongside your loss-making business.
  • In most other cases (including being a limited company), you will be able to carry that loss forward and use it against your (hopefully!) future trading profits.

There are very specific rules on what you can do with losses, so this is a very top-level explanation. For example, in some situations where you’ve been trading for a while, you can actually carry losses backwards against historic profits (and potentially get a tax refund).

This is also one of the reasons why it is worth registering for a tax return for your self-employed business, even though you are not currently making a profit.


Will I get into trouble if I run at a loss?

This is a difficult question to answer. Generally you will not get into trouble by running your business at a loss unless you start to rack up debts your business cannot pay.

If you actually trade ‘insolvently’, then you can find yourself in trouble with an insolvency practitioner if your business went bust.

For most small start-ups this will not be an issue. However, for those spending big, setting up credit terms with suppliers, or borrowing money at the beginning, it’s an important point to consider.

From a tax point of view, you will want to be able to prove you were attempting to make a profit, what is known as ‘operating on a commercial basis’. Basically, your business must be that, a business and not say a hobby. After all, it is rather too good to be true if you were able to offset the costs of your hobby against your tax bill!


Growth and trading losses

If you’ve been in business for a while, it’s not that unusual to have a year where you make a trading loss as you try and grow. You will have often built up enough profits where this is fine to do. In our experience, knowing that you will make a loss and planning for it is the best way to ensure you do not get into hot water later with your cash flow.


I’m still at a loss about making a loss…

In our view, business planning and financial projecting is key to knowing if making a loss will be OK for you over a period of time. If you’re not sure about your particular business circumstances, ask your accountant or book a consultation with us. We offer a popular “ask us almost anything” 1-hour, 1-2-1 paid consultation so you can get straightforward answers to your questions. You don’t need to be our client, and there’s absolutely no obligation to sign up (and we won’t ever push for that, rest assured).

So it’s a convenient way for you to get the help, when you need it, especially if your own accountant is really busy.