In a bid to provide further aid for struggling businesses, the Government has extended the period which trading losses can be carried back for tax relief purposes for relevant accounting periods ending between 1 April 2020 and 31 March 2022. This means that it will be possible to carry back relevant losses to set against profits incurred in the three years leading up to the period in which the loss was incurred, rather than the current one year. This article focusses on the rules for corporation tax, but there are similar provisions in relation to income tax which are available to unincorporated businesses.
There will be a £2,000,000 cap on the amount that can be carried back more than one year for each relevant accounting period in which a loss is made, which will apply on a group basis. This means a potential total cash refund of up to £760,000 is available to such businesses in the two years this extended relief is expected to be available. The £2,000,000 cap is not pro-rated for short accounting periods.
This relief will be particularly useful for previously profitable companies in sectors that have been heavily affected by the coronavirus pandemic. Such businesses should seek to utilise this extension to help with cash flows, alongside other available reliefs.
To give an example, a company that makes a loss in the year to 31 December 2020 would previously only have been able to carry this loss back to set against profits of the year to 31 December 2019. Under the new rules, once 2019 profits have been fully offset, up to £2m of such losses can be carried back against profits arising in the years ended 31 December 2018 and, if necessary, 2017.
Any extended relief available will be carried back to be offset against profits from the most recent years first. For example, a loss from 2020 is to be carried back to 2019 before 2018, and then to 2018 before 2017. Claims must be made within two years of the end of the accounting period in which the loss being carried back arises.
This claim will be required to be made in a tax return unless the losses available to be utilised more than one year before the beginning of the relevant period are below a de minimis limit of £200,000. Up to this amount, claims may be made outside of a return, meaning the benefit can be obtained without waiting to submit a company tax return for the period in which the loss is incurred.
Given that the £2,000,000 cap applies at group level, groups that have a member making a claim in excess of the de minimis will be required to submit an allocation statement to HMRC showing how the £2,000,000 cap has been allocated between group members. However, if no group company is able to make a claim in excess of the £200,000 de minimis, then no allocation statement is needed and no restriction applies, even if the total claims exceed £2,000,000.
The key points to note from today’s announcements are:
- this relief is available to companies for trading losses generated in the relevant accounting periods ending in the period 1 April 2020 to 31 March 2022;
- relief will be applied to the most recent years’ profits before being carried back to set against profits in earlier years;
- relief is capped at £2,000,000, per period, for standalone companies and for groups (unless each group company’s losses are below the de minimis threshold); and
- claims for relief for losses of up to £200,000 can be made before a tax return is filed but claims over this amount must be made in a tax return.
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