A range of new grants and loans are being made available for companies as we start to emerge from the disruption of Covid-19. These are complemented by a newly extended 3 year period during which trading losses can be carried back for tax relief purposes. This article explains how this extension works and offers considerations to mitigate the forthcoming corporation tax increase. Note slightly different rules apply to the loss carry back extension for unincorporated businesses.
Understanding the extended loss carry back rules for companies
If a company makes losses in an accounting year, it is able to either carry those losses forward to offset against future trading profits or carry the losses back to offset against profits made in the previous accounting year, thus obtaining a repayment of corporation tax suffered in that year. Company directors will generally choose the ‘carry-back’ option because it provides a cash injection to a currently loss-making company.
A temporary extension was announced in Budget 2021 to the period for which a trading loss can be carried back – for accounting periods ending between 1 April 2020 and 31 March 2022, this carry back period is extended to three years, with losses required to be set against profits of most recent years first before carry back to earlier years.
This extension is said to acknowledge existing and continuing trading difficulties and provide companies with an opportunity to receive a cash injection by way of a refund of corporation tax paid in previously profitable years.
Rules for incorporated businesses utilising extended loss carry back
The amount of trading losses that can be carried back to the preceding year remains unlimited as before.
The extended loss carry back is available for all companies and groups carrying on trades, professions or vocations.
Where the extended loss relief facility is utilised, the maximum amount that can be carried back each year for each relevant accounting period in which a loss is made is £2,000,000. This £2,000,000 limit applies separately to the unused losses of each 12 month period within the duration of the extension with groups of companies having a group cap of this amount.
The Black Sheep Inn Ltd makes a loss in the year to 31 December 2020 but has previously been profitable. Normally the loss could only be carried back to offset against profits made during the year ended 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.
The extended tax relief available must always 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.
All claims must be made in a corporation tax return however if the claim is £200,000 or lower, it can be submitted before the tax return is due.
Implications for mitigating the corporation tax increase
Also announced in the budget, corporation tax for all companies with profits in excess of £50,000 will increase to 25% from 1 April 2023. The existing rate of 19% will continue to apply to all small companies and a tapered rate will apply to those companies with profits between £50,000 and £250,000. The legislation to ratify this will be in the Finance Bill 2021.
Companies who may be impacted by the new 25% rate and who wish to utilise the extended loss carry back opportunity should evaluate the respective benefits of either claiming a tax refund now through relieving earlier year profits at a rate of 19% or carrying forward losses into the new regime where they may be offset at 25%. Often company directors prefer to claim a refund of corporation tax already paid rather than wait for an offset against future corporation tax liabilities. However it will be worth bearing in mind the difference in rates before making a final decision.