Extended loss carry back for businesses (2020 – 2022)

With the adverse impact of COVID-19 on businesses from across the spectrum, all eyes were on the Chancellor and the 2021 budget to provide support to businesses to facilitate their recovery.

An important support measure is the introduction of a temporary extension of the loss carry back rules for both companies and unincorporated businesses.

Under existing rules, any trade losses generated in an accounting period or tax year by companies and unincorporated businesses respectively can be carried back against taxable income of the previous year. Where taxpayers have already settled their liability for this period, the carry back could lead to a cash repayment of tax by HMRC.

The 2021 Budget extends the carry back of losses from one year to three years, on a last in, first out (LIFO) basis. The intention is that losses incurred by business as a result of the pandemic will be able to be carried back against profitable periods prior to the onset of COVID-19. The operation of the relief will be slightly different for companies and unincorporated businesses.

Proposed changes

Companies

Where a company’s accounting period ends between 1 April 2020 and 31 March 2022, any losses generated can be set against total profits of the period in question, followed by total profits of the previous year. These are as before and remain unchanged and uncapped.

Where losses remain, the company can elect to carry these back against the previous two years (so up to three years prior to the loss-making period). The loss must be carried back against the later years before earlier years (e.g., 2018 before 2017). The carry back is also subject to a cap, being £2,000,000 per relevant year. This could lead to a repayment for a company of up to £760,000 over the two periods cumulatively. Corporate groups will also be subject to an overall group cap of £2,000,000 for each relevant period, although each individual company will be able to carry back losses up to a de minimis limit of £200,000 without restriction, provided no company has losses in excess of the de minimis amount.

Loss carry back claims will be required to be made in a return as normal within two years after the end of the accounting period. However, claims for amounts below a de minimis limit of £200,000 may be made outside a return so companies with losses capable of providing relief up to a maximum of £200,000 could make a claim without having to wait to submit their company tax return.

Unincorporated Businesses

Where a person carrying on a trade makes a loss, under current rules the loss for a tax year can be set against general income of the loss-making year and/or the previous year. Any limits or restrictions on this remain unchanged.

As part of the extension to loss relief, any trading losses generated in the tax years 2020/21 and 2021/22 can be offset against profits of the same trade for up to three years and so potentially the earliest tax year against which relief could be obtained is 2017/18.

Similar to companies, the extension to the loss carry back is capped at £2,000,000 per tax year (so a total maximum carry back up to £4,000,000 over the two periods). This could result in a maximum repayment in the sum of £1,800,000.

Other considerations

The extension to the carry back of losses is extremely welcome and can provide businesses with a significant cash flow boost, however, taxpayers should be mindful of how best to utilise any losses to maximise relief. For example, with the expected rise in Corporation Tax rates in 2023 to 25%, carrying back any losses generated would mean an immediate cash flow advantage at 19% at the expense of a 6% reduction in tax relief that could be obtained if set against future profits. Similarly, where a taxpayer historically pays tax at the basic rate but is expected to move into the higher or additional rate bands in future, the carry back may not be the most efficient use of any losses.

We will be regularly updating the Budget pages of our website. If you would like to discuss the implications, please don’t hesitate to get in touch. Alternatively, book your place on our Budget question time webinar on Friday 5 March 2021 to find out more.