Loss-making companies were given extra support last year when the Chancellor announced a temporary change to the tax treatment of losses.
It meant companies could carry back trading losses to offset against profits for an additional two years, with a limit of £2m per year. Unincorporated businesses such as sole traders and partnerships could offset losses against general income.
To be able to receive tax repayments from previously profitable periods and generate cash flow will have come as a welcome relief to many businesses. It was of particular benefit to those badly affected by the pandemic who would take time to recover and return to a profit-making position.
It may also allow a trading business to enjoy a tax relief benefit even if they have struggled to generate a taxable profit in the last couple of years.
These changes apply to trading losses made by companies in accounting periods ending between 1 April 2020 and 31 March 2022 and for trading losses made by unincorporated businesses in tax years 2020/2021 and 2021/2022. Companies that are part of a group will be restricted to a group cap of £2million for each relevant period.
Businesses with a March 2022 year end can still benefit from this temporary change, but it is worth noting how this applies to terminal losses, property loss and claims below £200,000.
What has changed?
Prior to the announcement, using tax losses meant offsetting trading losses against total profits/general income in the same accounting period.
Trading losses which couldn’t be offset in the same accounting period in which they occurred could be carried back and offset against the total profits/general income of the preceding 12-month period. The amount that could be carried back could not be greater than the total profits/income in that period.
Under the new rules, losses carried back to the preceding 12 months are unlimited and losses can be carried back a further two years if necessary, limited to £2million each year. Losses are carried back on a last-in, first-out basis, meaning they are carried back to the most recent tax year first.
Trading losses may be carried forward and set against future trading profits until the losses are used. Losses may be subject to restrictions on the amount of profits that can be offset. Where profits exceed £5million, only 50% of the trading profits are available to be offset by the losses carried forward.
Terminal Loss Relief
Companies that cease to trade also have access to Terminal Loss Relief. This allows an unlimited carry-back of trading losses from the final accounting period against profits from the previous three years (provided that the company was carrying on the same trade).
Unlike trading losses, losses from property activities are offset against property profits, not trading profits, and are excluded from the additional two-year carry-back rules.
Extended loss carry-back claims must be made on the tax return. However, claims below £200,000 do not need to be included. Therefore businesses with losses of up to £200,000 may make a claim in respect of a relevant accounting period without having to wait to submit a company tax return.
HMRC has provided access to an online form to be used by taxpayers to make de minimis claims under the new temporary extended loss carry-back rules. Any taxpayer wishing to make a claim exceeding £200,000 must make the claim in their company tax return.
By Carmen Morrison, Senior Capital Allowances Analyst at business tax relief consultancy Catax