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Temporary Extension to Loss Carry Back Relief

As announced in the March Budget, carry back relief for trading losses has been temporarily extended from 1 year to 3 years, thereby providing a mechanism for loss making businesses to potentially access increased earlier year tax refunds. A brief outline of how the relief will operate for Income Tax and Corporation Tax is set out below, together with some of the issues that will need to be considered when determining if the carry back is the best option.

Income Tax

For traders that operate as either a Sole Trader or in Partnership, the temporary extension builds on existing loss relief provisions and will apply to losses incurred in the 2020/21 and 2021/22 tax years.  Therefore, a trading loss incurred in the 2020/21 tax year can be carried back for relief against trading profits of 2019/20, 2018/19 and 2017/18 (in that order). 

Existing loss relief provisions also allow a 2020/21 loss to be relieved against non-trading income of 2020/21 and/or 2019/20 and this must be considered before the extended carry back relief can be claimed. There are caps on the amount of losses that can be carried back / offset against non-trading income and therefore the optimal loss offset can require careful consideration.  

A claim to loss relief will normally be made via the self-assessment tax return, but where a claim affects more than one year a stand-alone claim may be made outside of the return once the loss has been calculated.

Corporation Tax

Once again, the temporary extension builds on existing tax loss relief provisions and applies to company trading losses that arise in accounting periods ending between 1 April 2020 and 31 March 2022.  As with the Income Tax relief provisions, the loss carry back is against the most recent year first.

By way of example, a company trading loss made in the year ended 30 April 2020 can now be carried back against profits of 30 April 2019, 30 April 2018 and 30 April 2017 (in that order). There will be many companies that have already submitted Corporation Tax returns for eligible loss making periods and consideration may need to be given as to whether those losses have been optimally utilised and an amended return needs to be submitted, something we at Mitchell Charlesworth are doing for our clients.

The extended rules do permit loss claims below £200,000 to be made outside of the tax return, which may be useful in accelerating claims for tax repayments where losses have been established but the company tax return is not yet finalised.

Points to consider

For both income tax and corporation tax, there is a £2 million cap on the amount of losses that can be carried back to the two earlier years that are now covered under the extended loss relief provisions. This cap is highly unlikely to impact many SMEs and unincorporated traders, but where relevant this may need to be considered as part of optimal loss relief planning. 

In the case of group companies, the £2 million cap applies at a group level, although the cap is lifted if each claim is below the £200,000 de minimis.  Where the group cap applies, so where a single claim of over £200,000 is made by a group company, an allocation statement detailing which group companies have been allocated a share of the group cap will need to be submitted.

A claim for the extended carry back loss relief should also be considered in light of the increased corporation tax rates that will apply from 1 April 2023. Based on the maximum carry back of £2 million (see above), the difference in tax relief would be up to £120,000 (i.e. £2 million at 6%). Companies will therefore have to consider whether to make the extended carry back claim and bank the refund at 19% or keep the losses and obtain relief at (up to) 25% from 1 April 2023, cashflow being a primary consideration.

Planning around changes of year end could help to provide maximum loss relief, for example, an expected loss for the year ended 30 April 2022 (company or unincorporated) may be brought into the extended loss relief provisions by shortening the accounting period to 31 March 2022. Consideration would obviously need to be given as to the amount of relief and whether such a step would actually be of benefit.

Please don’t hesitate to contact us if you want to discuss anything in more detail.

Written August 2021.

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