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.