In his Budget speech, the Chancellor announced a temporary extension to the period over which a business can carry back trading losses. This is potentially welcome news for previously profitable businesses struggling with COVID-19 losses.
The extension means that relief can be carried back to the three previous years – rather than the usual one year – potentially triggering a tax refund. Unlike the new super deduction, it’s available to unincorporated businesses, as well as companies.
Unincorporated business losses
For unincorporated businesses, the extension applies to trading losses made in the 2020/21 and/or 2021/22 tax years, allowing relief against profits of the same trade. A cap of £2 million applies to each extended carry-back loss year. There is no partnership-level limit.
For companies, the current rules allow trading losses to be carried back one year against total profits. For accounting periods ending between 1 April 2020 and 31 March 2022, trading losses will be available for carry-back for an additional two years against profits of the same trade.
Losses are required to be set against profits of most recent years first, before carry-back to earlier years. There is no change to the existing one-year unlimited carry-back. However, after that, there is a cap of £2 million on the losses that can be carried back to the earlier two years.
The cap applies to each loss-making year. There is a group cap of £2 million, though individual group companies have a £200,000 de minimis limit. Whilst most extended loss carry-back claims will need to be made in the company tax return, claims of £200,000 or less may be submitted earlier, outside the tax return.
+ more than one approach
As ever with tax, there are other issues to consider. There is more than one way to use a loss and, whilst the Budget incentive is to use carry back against trading income, a different approach may be better for your business. Loss relief for companies has has been more flexible since 2017, providing a wider range of options.
For unincorporated businesses, a key question will be how to use the loss in the most tax-efficient way whilst looking to retain the benefit of the personal allowance. In terms of timescale, HMRC will not action claims or make repayments until the Finance Bill receives Royal Assent, which is likely to be in the early summer.