Tax losses carry back

The Chancellor has widened the scope for companies and unincorporated businesses to carry back trading tax losses. This should enable businesses to encash the benefit of losses that have arisen in these difficult times by obtaining a tax refund.

Company losses

Under general principles, when a trading company makes a loss, it can relieve its losses against other profits of the company in the same accounting period, within a group, carry forward or carry back 12 months. Where the trade ceases, it is possible to carry back the loss to the previous three years (rather than the previous 12 months) using what is called ‘terminal loss relief’.

However, it is now proposed that a company can carry back the loss for up to three years, even if the trade does not cease. This relief is for a limited period and will only apply for accounting periods ending between 1 April 2020 and 31 March 2022.

The losses will be required to be set against profits of most recent years first, before initiating carry back to earlier years. The losses can be offset against all profits in the previous three years, not just trading profits.

No change is proposed to the current one-year unlimited carry back of trade losses. However, for the extended relief, the amount of loss that can be carried back to the earlier two years of the extended period is to be capped for each of those two years. This is a cap of £2,000,000 of losses for all relevant accounting periods ending in the period 1 April 2020 to 31 March 2021 (financial year 2020).  A separate cap of £2,000,000 applies for all relevant accounting periods ending in the period 1 April 2021 to 31 March 2022 (financial year 2021). Groups will be subject to a group cap of £2,000,000 for each relevant period. It should be noted that there is no similar cap for terminal loss relief.

Unincorporated business

Usually, when an unincorporated trading business (e.g., sole trader or partnership) makes a loss, it can relieve these against income and gains of the year and previous 12 months or carry forward against future profits of same trade. In addition, where the trade ceases then terminal loss relief is available which allows the loss to be relieved against profits from the same trade taxed in the four tax years to cessation.

It is now proposed that for trade losses of tax years up to 5 April 2021, unrelieved losses can be carried back and set against profits of the same trade for three years before the tax year of the loss. As with the extended relief for companies, it is a limited relief only, applying for two tax years. Unlike the company relief, only the loss can be carried back and offset against profits of the same trade.

The amount of loss for tax year to 5 April 2021 that an individual can carry back to the earliest two years of the extended period (2017 to 2018 and 2018 to 2019) is to be capped at £2,000,000 in total. Likewise, the amount of loss for tax year to 5 April 2022 that an individual can carry back to the earliest two years of the extended period (2018 to 2019 and 2019 to 2020) is to be capped at £2,000,000 in total. Unlike with companies in groups, there is no partnership level cap.

Next steps

For many businesses, incorporated or unincorporated, it will be key to consider the most effective utilisation of losses and how any cash flow benefit can be achieved as a result.  Early submission of results and potentially shortening accounting periods are potential actions to consider to optimise the position. As always, please do not hesitate to contact our team if you would like to discuss your options.