One of a number of important tax announcements for UK companies in the Chancellor’s Budget was the decision to extend the loss relief rule which will allow, for a temporary period, a carry back of trading losses for three years instead of one year.
The three-year carry back rule offers a time-limited opportunity to accelerate relief for losses incurred during the pandemic and therefore improve your cash flow through tax repayments.
The new rule applies to companies with trading losses in accounting periods ending between 1 April 2020 and 31 March 2022.
It also applies to sole traders and partnerships with losses in the tax years 2020/21 and 2021/22.
Importantly though, it will only benefit businesses that were making profits and paying tax in prior years.
What do you need to know?
The legislation allows losses to be carried back for up to three years, set against the most recent year first. However, a cap of £2m applies where losses are carried back for more than one year.
For example, a company with a £6m loss in the year ended 31 December 2020, and a £2.5m profit in 2019, must first offset £2.5m of the loss against the profit in 2019. Then only £2m of the balance of the loss (£3.5m) can be relieved against profits in 2018 and 2017, in that order.
For a group of companies, the £2m cap applies to the group as whole unless all group companies claim below a de minimis limit of £200,000. However, if one or more companies claim in excess of £200,000, the de minimis claims are taken into account in determining the cap on those claims.
A claim below £200,000 can be made as soon as the accounting period has ended, as long as the loss can be ‘quantified appropriately’; for instance, with evidence of management accounts. Otherwise, the claim must be made when filing the tax return.
It is important to note, however, that the earliest tax repayments to be processed by HM Revenue & Customs (HMRC) will be after the Finance Bill 2021 receives Royal Assent. So probably not until July 2021.
What should you do next?
The good news for loss making businesses is that the rule change is effectively respective. Companies will already have ended one of the two accounting periods that falls within the new rules. Claims below £200,000 can be made immediately and, for companies making higher losses, the sooner tax returns are filed, the earlier tax repayments can be made (subject to the legislation being enacted).
For the second of the two years, many companies should also benefit from the introduction in April 2021 of the 130% ‘Super Deduction’ for certain capital spend (see our previous ‘Spotlight On…’ article here). Not only will this increase tax losses for loss-making companies, but it is likely to bring many more ‘profitable’ companies into the loss relief rules as a result of the super tax deduction.
However, with the increase in the Corporation Tax rate in April 2023, business owners will need to weigh up the immediate cashflow benefit of relieving past profits (taxed at 19%), compared to carrying losses forward and sheltering future profits taxable at 25%.
Would you like to know more?
If you would like to discuss your specific situation, please contact your usual Blick Rothenberg contact or Neil Insull whose details you can find on this page.