The extension applies to all companies and unincorporated businesses making losses from carrying on trades, professions or vocations. The changes will provide a cashflow relief to those affected, by providing extended opportunity to relieve losses upfront, thereby generating additional tax repayments.
Income Tax
Currently, an individual incurring a trading loss can make a claim to offset that loss against their total income of the current year, the previous year or both years.
There are no limits on the offset of losses against profits from the same trade. Where a trading loss is offset against other income, restrictions apply to limit the amount to the higher of £50,000 or 25% of the individual’s adjusted total income.
Under the temporary provisions, trading losses incurred in the 2020/21 and 2021/22 tax years can be carried back up to three years with losses being offset against profits of the most recent year first.
For losses being carried back to the preceding year, i.e. 2020/21 to 2019/20 and 2021/22 to 2020/21 the current rules, as described above, continue to apply.
Losses being carried back to the prior two years, as allowed by the extension, i.e. 2020/21 to 2018/19 and 2017/18 and/or 2021/22 to 2019/20 and 2018/19, can be offset against profits from the same trade only and are subject to a cap of £2 million per loss making year.
Where losses exceed the £2 million cap, the balance can be carried forward to offset against future profits of the same trade.
For partnerships, the £2 million limit will apply to each partner rather than to the whole partnership.
It has recently been confirmed that losses incurred by Furnished Holiday Let businesses do not qualify for the extension.
Corporation Tax
Broadly speaking, the current rules allow a company incurring trading losses to offset them against other profits of the current accounting period, with any remaining amounts being eligible for carry back against profits arising in the previous 12-month period, with no limit on the amount of losses that can be carried back.
Similar to unincorporated business, the Finance Bill 2021 has introduced a temporary extension to the carry-back period, increasing it to three years. Again, losses are to be offset against profits of the most recent accounting period first.
The extension will apply to trading losses made in accounting periods which end between 1 April 2020 and 31 March 2022.
The amount of trading losses carried back to the preceding year remains unlimited. Losses being carried back further, to the prior two years, can be offset against profits from the same trade only and there is a cap of £2 million per 12-month accounting period.
The £2 million cap will be subject to a group-level limit, requiring groups with carry back losses in excess of £2 million to apportion the cap between its companies as appropriate.
Summary
Both unincorporated and incorporated businesses in a loss-making position are able to make claims to carry back losses and obtain tax repayments where applicable.
Those businesses who are in loss making positions may wish to consider early completion of their tax returns in order to expedite the benefit provided by the extended loss relief and boost their cashflow positions.
The next steps
For further information, get in touch with Macy Pu at m.pu@uhy-uk.com or via 0161 236 6936.
