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Extended Loss Carry Back Relief – Limited Companies

One of the proposals that was announced in the Budget was to provide a temporary extension to the loss carry back rules for trading losses of both corporate and unincorporated businesses.

This newsletter looks at how the changes will apply to a Limited Company and next week we will be looking at the impact on unincorporated businesses, which covers sole trader and partnerships.

ΩFor a Limited Company, the existing rules are that a company incurring a trading loss in an accounting period that are unused against profits in that year can claim for the balance to be offset against the profits from the preceding twelve-month period.

Alternatively, the trading loss can be carried forward to set against trading profits in the future.  There are restrictions but these only come into play when the profits exceed £5 million, only 50% of these profits are available for offset by carried-forward losses.

Should a Limited Company cease to trade, there is entitlement to Terminal Loss relief which allows unlimited carry back of trading losses of the final accounting period to set off against profits of the previous three years.

Under the new legislation, for accounting periods ending between 1st April 2020 and 31st March 2022, the carry back period will be extended to three years, with losses required to be set against profits of most recent years first before carrying back to earlier years.

No change is proposed to the current unlimited carry back of trade losses against the first year.  However, for the extended relief, the amount of loss that can be carried back to the earlier two years is to be capped at £2,000,000 for each of the trading years.  For group companies, there will be a group cap of £2,000,000 for each relevant period.

Normally, a carry back relief claim is made as part of the Corporation Tax return submission for the loss-making year.  However, there will be the provision to allow a claim of up to £200,000 to made outside the Corporation Tax return process.

Let’s take the example of Company A that has current year (CY) trading losses of £400,000 and profits of previous periods as follows:

CY-1 – £150,000

CY-2 – £200,000

CY-3 – £300,000

Under the current rules, Company A would be entitled to claim carry back relief of £150,000 against CY-1 profits.

Under the new rules, Company A would be entitled to claim carry back relief for the full £400,000 with £150,000 against CY-1 profits, £200,000 against CY-2 and £50,000 against CY-3.

It is worth bearing in mind in this scenario that, if Company A went on to make a further loss in the next year, there would be no further carry back relief available as the unused balance in CY-3 would then be out of scope.

If the profit profile had been different as follows:

CY-1 – £300,000

CY-2 – £400,000

CY-3 – £300,000

Under the new rules, Company A would be entitled to claim carry back relief for the full £400,000 with £300,000 against CY-1 profits and £100,000 against CY-2.

This would leave an available balance in CY-2 of £300,000 which, for the next year, would be deemed CY-3.

A claim for carry back loss relief can be made once the amount of the loss has been established.

One of the benefits of modern cloud-based accounting software like Xero is that the amount of the loss can be established within days of the end of the accounting period.  The Corporation Tax return submission flows naturally out of this process.

For businesses using other software or platforms which do not provide such an integrated solution, a stand-alone claim of up to £200,000 can be made under the provisions of Sch1A of the Taxes Management Act 1970 as soon as the loss-making accounting period has ended providing the losses can be quantified appropriately.

A claim under this process would require supporting documentation and evidence, such as draft accounts or management accounts, to enable the validity and accuracy of the claim to be verified.

Although the preparation for an Extended Loss Carry Back Relief can be made, HMRC will be unable to action the claim or process the repayment until Finance Bill 2021 receives Royal Assent.

Once this has happened, we expect HMRC to publish their guidance on the timeframe for the repayment to be made once a claim has been submitted.

The Recovery Loan Scheme

The Treasury has issued more guidance on The Recovery Loan Scheme.  However, many questions remain unanswered.

The Recovery Loan Scheme is designed to ensure businesses of any size can continue to access loans and other kinds of finance up to £10 million per business once the existing COVID-19 loan schemes close.  

Interestingly, “the finance can be used for any legitimate business purpose, including growth and investment.”

The scheme is due to launch on 6th April and is open until 31st December, although the close date is subject to review.

The loans will be available through a network of accredited lenders.  However, at this stage, it is not clear who the lenders will be.

The government will guarantee 80% of the finance to the lender with the expectation that this will provide confidence to lend to businesses.

There will be two types of finance:

The term period is up to six years for loans and asset finance facilities and up to three years for overdrafts and invoice finance facilities.

No personal guarantees can be taken on facilities of up to £250,000, and in no circumstances can the principal private residence of the borrower be taken as security.

The eligibility criteria for the Recovery Loan Scheme are that your business:

A definition of “collective insolvency proceedings” will be issued in due course.

Businesses that have funding under the existing COVID-19 loan schemes will be eligible to the Recovery Loan Scheme if they meet all other eligibility criteria.

Only a few business sectors cannot apply:

However, there are crucial questions that still need to be answered, primarily what will the interest rate be and precisely what security demands can lenders make?

The Recovery Loan Scheme launches as banks are about to start collecting the first repayments from the Bounce Back and Coronavirus Business Interruption Loan schemes in June.

Banks are privately indicating that 40-50% of the loans issued will not be paid either due to affordability or fraud.

Given this backdrop, the level of enthusiasm for The Recovery Loan Scheme amongst the traditional High Street banks remains to be seen.   However, this may provide an opportunity for alternative lenders to deliver a greater proportion of the overall funding.

We will be publishing updates on The Recovery Loan Scheme over the course of the next month as we receive more clarity on these issues.

The 2021 UK Budget – Our Twelve Key Takeaways

The Chancellor, Rishi Sunak, unveiled the 2021 UK Budget in parliament today and there were twelve key takeaways:

1 – The Coronavirus Job Retention Scheme Extended To The End Of September 2021

Employees will continue to receive 80% of their current salary capped at £2,500 for hours not worked. However, the employer will need to make a 10% contribution in July and a 20% contribution in August and September.

See our blog on this topic here – https://cooperfaure.designmindshost.com/covid-19-business-support-job-retention-scheme-extended-by-a-month-and-more/

2 – Self-Employment Income Support Scheme Fourth Grant To Be Based On The 2019-20 Tax Return

The grant will be worth 80% of three months’ average trading profits covering the February to April period.  As before, it will be paid as a single amount and will be capped at £7,500 in total. All other eligibility criteria will remain the same as for the third grant, so there remains no support for those who were remunerated by dividends. The grant can be claimed from late April.

3 – Self-Employment Income Support Scheme Fifth And Final Grant

There will be a fifth and final grant covering the May to September period. The value of the grant will be determined by a turnover test.  Individuals whose turnover has fallen by 30% or more will continue to receive the full grant, 80% of three months’ average trading profits capped at £7,500. Individuals whose turnover has fallen by less than 30% will receive a 30% grant, capped at £2,850. The final grant can be claimed from late July.

See our latest blog on this topic here – https://cooperfaure.designmindshost.com/covid-19-the-government-has-announced-a-welcome-second-grant-under-the-self-employment-income-support-scheme-but-key-groups-to-the-revival-of-the-economy-are-still-left-with-nothing/

4 – Stamp Duty Land Tax Cut Extended in the 2021 UK Budget

The temporary increase in the residential Nil Rate Band to £500,000 in England and Northern Ireland has been extended until 30th June 2021. From 1st July 2021, the Nil Rate Band will reduce to £250,000 until 30th September 2021 before returning to original level of £125,000 on 1st October 2021.

5 – The Recovery Loan Scheme To Launch On 6th April

The government will underwrite lenders with a guarantee of 80% on eligible loans between £25,000 and £10 million.  The scheme will be open to all businesses, including those who have already received support under the Bounce Back Loan Scheme or CBILS.

See our latest blog on this topic here – https://cooperfaure.designmindshost.com/the-recovery-loan-scheme/

6 – Restart Grants To Provide Support For Businesses As They Reopen

This measure applies to England and offers grants of up to £6,000 per premises for non-essential retail businesses and up to £18,000 per premises for hospitality, accommodation, leisure, personal care and gym businesses.

7 – VAT Reduction For The UK Tourism And Hospitality Sector To Continue

The temporary reduced rate to 5% VAT for goods and services supplied by the tourism and hospitality sector will continue until 30th September 2021.  A 12.5% rate will apply for the subsequent six months until 31st March 2022 with the rate then returning to 20%.

8 – Business Rates Relief To Continue For Eligible Retail, Hospitality And Leisure Properties In England

There will be 100% business rates relief from 1st April 2021 to 30th June 2021 followed by 66% business rates relief for the period from 1st July 2021 to 31st March 2022.  The relief will be capped at £2 million per business for properties that were required to be closed on 5th January 2021, or £105,000 per business for other eligible properties.

9 – The Carry Back Loss Period Extended From One To Three Years

This will be available for both incorporated and unincorporated businesses. Relief for up to £2 million of losses in each of 2020-21 and 2021-22 years can be carried back against profits in the preceding three years to generate a Corporation Tax or Income Tax refund.

See our latest blog on this topic here – https://cooperfaure.designmindshost.com/extended-loss-carry-back-relief-limited-companies/

10 – Corporation Tax Bears The Brunt To Fund The Deficit

In a reversal of the previous strategy, Corporation Tax will increase from April 2023 to 25% on profits over £250,000.  The rate for small profits of up to £50,000 will remain at 19%.  There will be an as yet undefined tapered increase in the rate on profits between £50,001 and £250,000.

11 – Research And Development Tax Relief Rules Changed To Prevent Abuse

Despite there being little evidence of widespread abuse, for accounting periods beginning on or after 1 April 2021, the amount of SME payable R&D tax credit that a business can receive in any one year will be capped at £20,000 plus three times their total PAYE and NICs liability.  At the same time, there will be another R&D consultation to cover whether the schemes should be amended to remain internationally competitive and keep the UK at the cutting edge of innovation.

See our latest blog on this topic here – https://cooperfaure.designmindshost.com/research-and-development-tax-relief-testimonial/

12 – The Rabbit From The Hat – The Super-Deduction

Whilst the preceding policy announcements had been widely revealed before the 2021 UK Budget, the Chancellor held one announcement back.  From 1st April 2021 until 31st March 2023, companies investing in qualifying new plant and machinery assets will benefit from a 130% first-year capital allowance.  This super-deduction will allow companies to cut their tax bill by up to 25p for every £1 they invest.

As ever, the Budget document runs to over one hundred pages covering a lot more than in the speech.  For instance, the contactless payment card limit will increase to £100, and cumulative contactless payments up to £300.  Banks are expected to implement the new limits during the year. 

We will be reviewing the document to unearth other gems for our next newsletter over the weekend.

We will also be looking at how the changes to the Corporation Tax rate will impact the remuneration strategy between salaries and dividends.  In April 2016, the personal tax treatment of dividends changed. This closed the gap on the overall tax paid between a salary and a dividend, but it still tilted in favour of a dividend.

At the time, the Corporation tax rate was 20%.  From 2023, with the rate 5% higher, the overall tax basket may well tilt in favour of a salary.

Further information is available from gov.uk – https://www.gov.uk/government/topical-events/budget-2021