Why do we have tax relief for losses?

Our tax code provides relief for losses so that the profits earned over the lifetime of a business are taxed once and only once. For example, a business has made trading profits of £550,000 and losses of £200,000 over five years, and has no other income. Its net profits are £350,000 and tax is paid on that amount, as shown below:

Losses

The company would be able to claim to have the loss in year 3 set first against the profit of year 2, leaving a smaller loss to carry forward, but the table shows how the carry forward of trade losses works. There are conditions, and special rules for banks and groups of companies.

Bringing forward allowable trading losses is not tax avoidance, and it is worth noting that a similar relief (with some important differences) is available to the self-employed. It is not just for companies.