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Need to Claim Loss Relief? Here are some FAQs to guide you…

Loss Carry Back for Companies and Unincorporated Businesses – A Temporary Extension

During these times of uncertainty many businesses will unfortunately have found themselves in a loss-making position, often for reasons outside their control. The Government have therefore recently announced a very welcome extension to the rules for claiming trading losses.

Claiming trading losses can generate significant tax savings for both companies and unincorporated businesses.  This temporary extension to the rules currently allows losses to be carried back for up to three years prior to the loss-making year rather than the standard 12 months. Here we provide a summary of the rules for both companies and unincorporated businesses.

 

Companies

What are the rules for claiming loss relief?

Companies can claim relief for trading losses in the following ways:

  • Offset the loss against total profits of the same accounting period
  • Carried back and offset against total profits of the preceding 12-month period
  • Carried forward and offset against future profits
  • On cessation of a trade, terminal loss relief can be claimed which can allow an unlimited carry back of trading losses arising in the final accounting period to be offset against profits of the previous 3 years.

 

What is the temporary extension?

A temporary extension applies for trading losses incurred in accounting periods ending between 1 April 2020 and 31 March 2022 which permits the losses to be carried back for a period of three years rather than the standard 12 months. The exact mechanics of the rules depend on whether the claim is being made by a standalone company or by a company that is part of a group, although losses will need to be offset against total profits of later years before earlier years.

 

Can all trade losses be carried back?

There is no limit on the amount of trading losses that can be carried back to the previous 12 months. However, after carry back to the prior year, the maximum amount of losses that may be carried back by a company to the earlier two years is:

  • £2 million for losses arising in accounting periods ending between 1 April 2020 and 31 March 2021, and
  • £2 million for losses arising in accounting periods ending between 1 April 2021 and 31 March 2022

 

How are group companies affected?

Group companies can make an extended loss carry back claim, and there is a de minimis amount of £200,000 where claims are not restricted. Where the claim exceeds the de minimis amount of £200,000, the claim can only be made when the total of all other claims made by the company and other members of the group does not exceed £2 million. Separate reporting requirements apply, and the claim will need to be accompanied by a loss allocation statement clearly showing how the £2 million cap has been allocated. If all group companies only make de minimis claims, the cap and reporting requirements do not apply even if the total of all claims made exceeds £2 million.

 

How is the loss claimed?

In most cases, the loss will be claimed on the company tax return in which case the deadline for making a claim is 2 years of the end of the accounting period in which the loss being carried back arises.

However, if the loss claim is less than £200,000, a claim can be made outside of the tax return using an online claim submission form which can be made as soon as the accounting period in which the loss occurs has ended once the loss has been quantified.

 

Is it worth making a claim under the temporary extended rules?

This depends. Companies should consider whether to make the extended carry back claim, saving tax at up to 19%, or retain the losses with a possible tax saving of up to 25% from 1 April 2023, when it is proposed that corporation tax rates will increase.

 

Unincorporated Businesses

What are the rules for claiming loss relief?

Where an individual makes a trading loss for a tax year loss relief can be claimed as follows:

  • Offset against the individual’s general income for the loss-making year, the previous year or both years
  • Carried forward to be set against future profits of the same trade
  • For new businesses, losses can be offset against an individual’s other income for up to three tax years preceding the loss-making year
  • If a business ceases to trade, terminal loss relief allows a qualifying loss to be offset against profits of the same trade for up to the four final years of trading
  • Where the relevant conditions are met, a loss can also be treated as a capital loss and offset against capital gains

 

What is the temporary extension?

For trading losses of tax years 2020/21 and 2021/22, the losses can be carried back and set against profits of the same trade for three years before the tax year of the loss with losses being carried back against later years first.

A loss claim must first be made against net income for either the year or the loss and/or the previous year unless the individual claiming the loss does not have any income against which the loss can be claimed in the current year or prior year.

 

Is there a limit on the losses which can be carried back?

Where trading losses are carried back and offset against trading profits of the previous 12 months, the amount of trading losses that can be used is unlimited. After carry back to the prior year, the maximum amount of trading losses that may be carried back against trading profits of the earlier two years is £2 million for each tax year.

 

Who qualifies as an unincorporated business?

Sole traders or partners in a partnership will be eligible to claim loss relief under the temporary extended rules.

 

How long will the changes apply for?

The proposed change is temporary and will only apply to trade losses for tax years 2020/21 and 2021/22. Trade losses in 2022/23 will be subject to the normal one year carry back rule.

 

How can a claim be made?

Losses are normally claimed on an individual’s self-assessment tax return, however in certain circumstances, it may be possible to make a standalone claim once the basis period for which the loss is made has ended.

For losses in 2020/21, the deadline for making a claim is 31 January 2023.

For losses in 2021/22, the deadline for making a claim is 31 January 2024.

 

If you would like any further support or advice please contact Mark Moore or Marina Trinchese or fill out the contact form below and we will be in touch.

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