Self-employed: swings and roundabouts

THE self-employed have one modest advantage over the rank and file who have a job working for someone else and are taxed on the basis of PAYE. The self-employed tend to pay tax every six months rather than monthly or weekly, and they tend to pay it many months after the money has come in. They can also claim much more in the way of expenses to offset their earnings. But the downside is that they can lose money as easily as they earn it, and their tax affairs are much more complicated pound for pound than those of the average employee.

Budding entrepreneurs who have given up the security of a job to become self-employed can find it tough going, especially in the early years. And it is possible to make a loss, if business expenses exceed the income generated. Fortunately, some tax relief is available for business losses, but there are several options.

For example, losses in the first four years can be set against income of any sort in the three previous years. So, for example, it is possible to reclaim tax paid while you were still in a job.

There is a time limit to make this sort of claim of two years from the tax year in which the loss was made. That means anyone wanting to put in a claim for a loss in the tax year ending on 5 April, 1993, must do so by 5 April, 1995.

A business loss in any year can be set against any other income for the same year. So, for example, someone who is partially self-employed but who also works for an employer will have another source of income from which tax can be reclaimed. Again, there is a two-year time limit to make a claim.

Another option is to set losses against any income for the following tax year. So losses made in 1991/2 can be set against income in 1992/3. Again, the two-year rule means claims for losses incurred in 1992/3 need to be made by the coming 5 April.

Other possibilities are to set losses against subsequent profits from the business - but not against any other income. Here there is a six- year time limit.

All in all, working out how to use losses can be difficult, and advice may be needed from a professional or from the tax office. But bear in mind the time limits, and the imminence of 5 April.