loss relief carry back extension

HMRC have announced a temporary extension of loss relief carry-back for both companies, sole traders and partnerships, as many businesses across the UK are likely to make losses in the 2020-21 tax year due to the havoc resulting from COVID disruption. The recent Budget announced that losses can be carried back for an extended period was most welcome for many businesses. The policy  aims to provide a cashflow benefit to affected businesses by providing additional relief for trading losses, thereby generating repayments for tax paid for two additional years. To facilitate this change, loss relief carry back for trading losses will be extended from the current one year entitlement to a period of three years, with losses being carried back against later years first.

The Current Rules

Companies

Under the existing rules a company incurring a trading loss in an accounting period may make a claim for that loss to be set off against total profits of the same accounting period.

Additionally, it can claim for the unused balance of such losses to be set off against all profits of the preceding 12-month period, provided that the company was carrying on the trade in that accounting period. Where an accounting period straddles the preceding 12-month period, the profit is apportioned and losses can only be set off against profits falling within the 12-month period.

Alternatively, a trading loss may be carried-forward and set against trading profits or set against total profits of subsequent accounting periods.

The current rules generally allow trading losses to be carried back one year without restriction. For accounting periods ending between 1 April 2020 and 31 March 2022, this will be extended to three years, with losses required to be set against profits of most recent years first before carry back to earlier years.

Self Employed and Partnerships

Currently, when a person carrying on a trade makes a loss for a tax year they may claim for that loss to be set off against their general income for the loss making-year, the previous year, or both years.

If a claim to trade loss relief against general income has been made, or if a claim has not been made because there is no general income against which a loss could be set, a person may also claim to treat any unrelieved loss as a capital gains loss of the tax year in which relief is claimed against general income

The Loss Relief Carry Back Extension

Companies

No change is proposed to the current one-year unlimited carry back of trade losses, however, for the extended relief, the amount of loss that can be carried back to the earlier two years of the extended period is to be capped for each of those two years. This is a cap of £2,000,000 of losses for all relevant accounting periods ending in the period 1 April 2020 to 31 March 2021 (financial year 2020). A separate cap of £2,000,000 applies for all relevant accounting periods ending in the period 1 April 2021 to 31 March 2022 (financial year 2021). Groups will be subject to a group cap of £2,000,000 for each relevant period.

Extended loss carry back claims will be required to be made in a return, however, claims below a de minimis limit of £200,000 may be made outside a return. This means that any stand-alone or group company with losses capable of providing relief up to a maximum of £200,000 may make a claim in respect of a relevant accounting period without having to wait to submit its company tax return.

Any stand-alone company or group company wishing to make a claim exceeding £200,000 will be required to make the claim in their company tax return.

Self Employed and Partnerships

For trade losses of tax years 2020 to 2021 and 2021 to 2022 it is intended to provide additional relief by allowing unrelieved losses to be carried back and set against profits of the same trade for three years before the tax year of the loss.

The amount of loss for tax year 2020 to 2021 that an individual can carry back to the earliest two years of the extended period (2017 to 2018 and 2018 2019) is to be capped at £2,000,000 in total. Likewise, the amount of loss for tax year 2021 to 2022 that an individual can carry back to the earliest two years of the extended period (2018 to 2019 and 2019 to 2020) is to be capped at £2,000,000 in total.

The Years Concerned

Remember, this extension will apply to trading losses made by companies in accounting periods ending between 1 April 2020 and 31 March 2022 and to trading losses made by unincorporated businesses in tax years 2020-21 and 2021-22. Full details of the HMRC statement can be found online.