Temporary extension to trading loss carry-back rules

The government has announced an extension to the trading loss carry-back rules from 12 months to three years to help businesses hit by the pandemic.

This temporary extension is aimed at aiding struggling businesses to claim a repayment for tax they have paid in order to boost their cashflow.

A number of businesses have experienced reduced demand for their products and services or disruption to their supply chains as a result of the pandemic and the restrictions imposed to counter its spread.

This has led to increased trading losses in the short term. The extension, announced in the Budget, will provide additional relief for trading losses, generating tax repayments for two additional years.

All companies and unincorporated businesses making losses can benefit from the additional relief, which relates to both corporation and income tax.

The measure will have an effect on company accounting periods ending in the period April 1 2020 to March 31, 2022 and for tax years 2020 to 2021 and 2021 to 2022 for unincorporated businesses.

Currently, a company incurring a trading loss in an accounting period can make a claim to offset that loss against total profits of the previous 12 months, after first having set the losses against any profits of the accounting period in which it occurred.

Under the new legislation the carry back will be extended to three years, with losses being carried back against later years first.

There is no limit on the amount of trading losses that companies can carry back to the preceding year.

However, there will be a limit of £2,000,000 on losses for years two and three and this limit will apply separately in each loss-making year.

When it comes to income tax, an individual incurring a trading loss in a tax year can make also a claim to offset losses against their net income of the current year, the previous year or both years.

Again, there will be no limit on the amount of trading losses that can be carried back to set against profits of the preceding year.

However, a separate £2,000,000 cap will also apply to the extension period, applied separately to losses made in 2020/21 and 2021/22.

Businesses need to make sure that their loss claims are submitted correctly in their tax returns and meet the relevant reporting deadlines in order to claim repayments.

• To find out more about this extension please contact WNJ on 01772 430000