Making the most of what you have lost during the Covid crisis

Frequently Asked Business Question:

My business has been severely impacted by Covid 19 and I expect to have a substantial trading loss in my business. What reliefs are available to me?

Top Tip:

The recent Budget introduced a new extended loss carryback for sole traders, partnerships, and companies giving the opportunity to make the most of any trading losses related to the pandemic.

Under the normal loss carry-back rules:

• Companies must first set a current year trading loss against profits of the same accounting period, before carrying any unused loss back to set against any profits of the previous year.
• Sole traders and partnerships can set a trading loss against general income of the same year, the previous year or both.

No changes are proposed to these rules.  However, under a new temporary extended relief, certain trading losses will also be available to be carried back a further two years.

The extended loss carryback is available for companies but will only apply to trading losses. For companies, trading losses arising in accounting periods ending in the following periods are eligible for the extended loss carryback:

• 1 April 2020 to 31 March 2021
• 1 April 2021 to 31 March 2022

These losses can be carried back against the total profits of the company arising in the previous three years.

For sole traders and partnerships, trading losses for the following tax years are eligible for extended carry back:

• 2020/21
• 2021/22

Losses for these tax years can, as before, be carried back against the general income of the previous year subject to the usual limits. However, they can also be carried back against trading profits (but not general income) of the two earlier tax years.

Whilst this is not as generous as for companies – where losses can be carried back against total profits for up to three years) – it does mean that the £50,000 / 25 percent of total income cap on income tax reliefs will not apply to the extended loss carry back.

Relief will apply to both income tax and Class 4 NICs.

For both companies and sole traders and partnerships, losses must be carried back in order, with profits of most recent years offset before those of earlier years.

For both companies and unincorporated businesses, there is no new limit on the amount of losses that can be carried back to the immediately preceding year under the existing rules. However, a new £2m cap will apply to losses carried back beyond this to the two earlier years.

This cap applies per year of loss – not per year of profits offset. Broadly, this means that:

• for companies, up to £2m worth of losses can be carried back per relevant accounting period to the two and three years before; and
• for unincorporated businesses up to £2m worth of losses can be carried back from:
  • tax year 2021/22 (against 2019/20 and 2018/19)
  • tax year 2020/21 (against 2018/19 and 2017/18)

In addition, for groups of companies, a separate cap of £2m per group per relevant accounting period may apply. This group cap will not apply if all group companies only make claims below a de minimis limit of £200,000 per relevant accounting period – even where the total claims across the group exceed £2m.

For example, a group of 20 companies each claiming £150,000 of losses would not be subject to the cap (even though total claims by the group equate to £3m). However, a group of two companies where one claims £1.9m of losses and the other £150,000 would be subject to the group cap.

The general rule is that claims for loss relief have to be made in the income tax or corporation tax self-assessment return. However, these rules can be relaxed in certain circumstances

For sole traders and partnerships, a stand-alone claim for extended relief can be made as soon as the basis period for which the loss is Tamade has ended and the loss has been calculated.

For companies, claims below the de minimis limit of £200,000 can be made outside of the return.  This allows claims to be submitted as soon as the accounting period of the loss has ended, potentially accelerating tax repayments. However, evidence, such as draft or management accounts, will have to be provided to show that the amount of the loss can be quantified appropriately. Claims above the £200,000 de minimis limit have to be made in a company tax return.

For more information and/or assistance, please contact our Tax Team who will be pleased to help you.