All you need to know about the temporary extension to the trading losses carry back rules for both corporate and unincorporated businesses
As announced in the Budget 2021, Schedule 2 of Finance Act 2021 includes a temporary extension to the trading losses carry back rules for both corporate and unincorporated businesses (including a profession or vocation, and a partnership).
As a reminder, currently s.37 CTA 2010 allows a company (subject to certain restrictions re trading) to set off a trading loss incurred in an accounting period against total profits of the same accounting period or against total profits of the preceding 12-month period. It can also carry forward losses and set these against trading profits of subsequent accounting periods (depending on whether the losses are pre or post 1 April 2017 trade losses).
There is a restriction where profits exceed £5m: only 50% of these profits are available for set off against carried-forward losses and such carried-forward losses from earlier periods cannot be carried back.
Companies ceasing to trade can also claim Terminal Loss relief (s.39 CTA 2010) by carrying back trading losses of the final accounting period to set off against profits of the previous three years.
The extended carry-back rules will now allow trading losses to be carried back three years instead of just one. This is a temporary measure that will apply to losses for accounting periods ending between 1 April 2020 and 31 March 2022.
The order of relief will be set-off against profits of most recent years first before carry back to earlier years; for example loss from Current Year (CY) to be carried back to CY-1 before CY-2 or CY-3 and to CY-2 before CY-3.
There will also be a cap applying to the earlier two years of the extended period – being £2,000,000 of losses for all relevant accounting periods ending in the period 1 April 2020 to 31 March 2021 (FY 2020) and a separate cap of £2,000,000 for all relevant accounting periods ending in the period 1 April 2021 to 31 March 2022 (FY 2021). Groups will be subject to a group cap of £2,000,000 for each relevant period.
Whilst most claims will be required to be made in a return, claims below a de minimis limit of £200,000 can be made outside a return - which is good news as stand-alone or group loss claims up to that limit will not require waiting for the company tax return to be submitted. The claim can be made as soon as the losses have been ‘established’ – usually quantified once the accounting period has ended. Stand-alone de minimis claims can be made under Sch1A Taxes Management Act 1970 but will require sufficient information and evidence to enable their validity and accuracy to be verified and include relevant information such as:
Claims to the extended loss relief must be made within two years of the end of the accounting period in which the loss being carried back arises.
If there are insufficient profits in earlier years to absorb loss relief claims under these rules, any unrelieved losses can be carried forward to set against trading profits in future tax years.
The new rules also include anti-avoidance provisions for group companies where a company cannot make a 2020 (or 2021) claim if the main purpose (or one of the main purposes) of it ceasing to be a member of a group at any time in the period 1 April 2020 to 31 March 2021 (or 1 April 2021 to 31 March 2022 for 2021 claims) is to increase the total amount of relief given as a result of the claim.
Existing rules for unincorporated business allow various forms of loss claims for trading losses against income as well as in certain circumstances against capital gains. Note that these reliefs against general income are limited to the higher of £50,000 or 25% of adjusted total income.
Whilst there are no changes to these rules, the limit above does not apply to losses used against profits of the same trade. Therefore, losses set against profits of the same trade of the previous year, as part of a claim for trade loss relief against general income, are not subject to a limit.
Trading losses for tax years 2020-21 and 2021-22 will be allowed to be carried back and set against profits of the same trade for three years before the tax year of the loss. This will subject to similar caps for companies, ie losses for tax year 2020-21 to be carried back to the earliest two years of the extended period (2017-18 and 2018-19) will be capped at £2,000,000 in total. Similarly, losses for tax year 2021-22 to be carried back to the earliest two years of the extended period (2018-19 and 2019-20) will be capped at £2,000,000 in total.
These temporary loss relief rules will only apply to trade losses for tax years 2020-21 and 2021-22. Trade losses for tax year 2022-23 will revert to the normal one year carry back rule.
Similar to company provisions, loss claims by individuals should normally be made in the self-assessment tax return, but where a claim will affect more than one year a stand-alone claim may be made outside of a return as soon as the basis period for which the loss is made has ended and the loss has been calculated. The claim must specify:
The time limit for loss claims for tax year 2020-21 will be 31 January 2023 and for tax year 2021-22 it will be 31 January 2024.
Further details as well as numerous examples can be found in HMRC’s policy paper for the extended loss relief rules.