The Budget 2021 and Finance Bill have introduced a new extended loss carry back for businesses subject to income and corporation tax, giving the opportunity to make the most of any trading losses related to the pandemic.
What is changing?
Under the normal loss carry back rules:
- Companies must first set a current year trading loss against profits of the same accounting period, before carrying any unused loss back to the set against any profits of the preceding twelve months.
- Unincorporated businesses (such as sole traders and individuals who are members of a partnership) can set a trading loss against general income of the same year, the previous year or both.
No changes are proposed to these rules. However, under a temporary extended relief, certain trading losses will also be available to be carried back a further two years.
How will extended relief work?
The extended loss carry back is available for both companies and incorporated businesses, but will only apply to trading losses.
For companies, trading losses arising in accounting periods ending in the following periods are eligible for the extended loss carry back:
- 1 April 2020 to 31 March 2021
- 1 April 2021 to 31 March 2022
These losses can be carried back against total profits of the company arising in the previous three years.
For unincorporated businesses, trading losses for the following tax years are eligible for extended carry back:
Losses for these tax years can, as before, be carried back against general income of the previous year subject to the usual limits. However, they can also be carried back against trading profits (but not general income) of the two earlier tax years.
Whilst this is not as generous as for companies – where losses can be carried back against total profits for up to three years) – it does mean that the £50,000 / 25 percent of total income cap on income tax reliefs will not apply to the extended loss carry back.
Relief will apply to both income tax and Class 4 NICs.
For both companies and unincorporated businesses, losses must be carried back in order, with profits of most recent years offset before those of earlier years.
Are there any limits?
For both companies and unincorporated businesses, there is no new limit on the amount of losses that can be carried back to the immediately preceding year under the existing rules. However, a new £2m cap will apply to losses carried back beyond this to the two earlier years.
This cap applies per year of loss – not per year of profits offset. Broadly, this means that:
- for companies, up to £2m worth of losses can be carried back per relevant accounting period to the two and three years before; and
- for unincorporated businesses up to £2m worth of losses can be carried back from:
- tax year 2021/22 (against 2019/20 and 2018/19)
- tax year 2020/21 (against 2018/19 and 2017/18)
In addition, for groups of companies, a separate cap of £2m per group per relevant accounting period may apply. This group cap will not apply if all group companies only make claims below a de minimis limit of £200,000 per relevant accounting period – even where the total claims across the group exceed £2m.
For example, a group of 20 companies each claiming £150,000 of losses would not be subject to the cap (even though total claims by the group equate to £3m). However, a group of two companies where one claims £1.9m of losses and the other £150,000 would be subject to the group cap.
In applying the de minimis limit of £200,000, companies must assume that:
- All capital allowances and other available claims or reliefs are claimed;
- a carry back to the immediately prior year has been made; and
- group relief is not surrendered.
Where the group cap applies, the group will have to nominate a company to prepare and submit an allocation statement to HMRC showing how the £2m cap is to be shared out between the group companies in a similar manner as is required under the restriction on carried forward losses.
There is no equivalent partnership level cap for unincorporated businesses.
When can I claim?
The general rule is that claims for loss relief have to be made in the income tax or corporation tax self-assessment return. However, these rules can be relaxed in certain circumstances
For unincorporated businesses, a stand-alone claim for extended relief can be made as soon as the basis period for which the loss is made has ended and the loss has been calculated.
For companies, claims below the de minimis limit of £200,000 can be made outside of the return. This allows claims to be submitted as soon as the accounting period of the loss has ended, potentially accelerating tax repayments. However, evidence, such as draft or management accounts, will have to be provided to show that the amount of the loss can be quantified appropriately. Claims above the £200,000 de minimis limit have to be made in a company tax return.
In all cases, the usual time limits for claiming loss relief apply – i.e. claims by companies have to be made within two years of the end of the accounting period of loss, and claims by unincorporated businesses by the first anniversary of the filing deadline for the relevant return.
HMRC have said that they are unable to give effect to claims or make repayments until the Finance Bill receives Royal Assent. In addition, where the period to which losses are carried back is under enquiry, repayments may be delayed until that enquiry is resolved.
The legislation for the extended carry back can be found in Clause 18 and Schedule 2 of the Finance Bill currently passing through Parliament. HMRC have also published a policy paper which provides more explanation of how the rules will work, including a number of practical examples.