To help businesses weather the economic impact of COVID-19, the corporation tax and income tax trading loss carry back rules will be temporarily extended. The amendment will allow relief to be carried back to the previous three years rather than the usual one year.
What it means for companies
The Government has announced an extension to the carry back of trading losses for corporation tax made in accounting periods that end between 1 April 2020 and 31 March 2022.
In addition to the usual one-year carry back against total profits, the losses may be carried back a further two years against profits of the same trade. Losses are carried back against later years in preference to earlier years.
There is a £2m cap for trading losses being carried back more than one year. Losses carried back one year are unlimited, as before. A separate £2m cap applies for each period of 12 months within the duration of the extension. For example, a company with a 31 March year end will have one £2m cap for its 2021 year end and a second £2m cap for its 2022 year end.
If the amount of the claim is not (and could not be) more than £200,000, the claim can be made outside of the tax return. In calculating if the £200,000 threshold is exceeded, the company must consider all capital allowances or any other claim or reliefs available to it.
The £2m cap applies to groups of companies, unless all group companies’ claims are individually below the threshold, so loss-making groups will need to decide how best to utilise losses amongst members. Groups subject to the £2m cap must submit an allocation statement showing how it has been allocated between its members.
What it means for unincorporated businesses
For income tax, trading losses made in the 2020/21 and 2021/22 tax years are subject to these new rules. Sole traders must offset losses against profits of the same trade. Losses are carried back against later years in preference to earlier years.
There is a separate cap of £2m for each tax year of loss. A sole trader therefore has a £2m cap for 2020/21 and another £2m cap for 2021/22.
Sole traders can make a claim in their tax return, or if the claim affects more than one tax year, a standalone claim may be made.
HMRC will not give effect to claims and make repayments until Finance Bill 2021 receives Royal Assent.
Our comment
This is good news for certain businesses struggling because of COVID-19, enabling them to offset trading losses against earlier years of profit to obtain a tax repayment to aid their cashflow.
For companies, the ability to claim outside a tax return is also a welcome simplification for losses of £200,000 or lower. This should allow companies to obtain repayments without having to wait for the submission of the tax return for the loss making period.
For sole traders, these new rules mean they may be able to reduce their marginal rates of income tax in the earlier years.
The extension to the relief does not, however, apply to property businesses who may be struggling because of loss of tenants, especially those in the retail sector.
When will it apply?
For companies, it will apply to losses made in accounting periods ending between 1 April 2020 and 31 March 2022.
For unincorporated businesses, it will apply to basis periods ending in the 2020/21 and 2021/22 tax years.