16 April 2021
Temporary Extension to Loss Carry Back
An extension to the carrying back of losses for businesses subject to corporation tax or income tax has been announced in the Budget 2021. This is one of a number of measures which the government has announced which aims to assist businesses that have suffered financially as a result of the Coronavirus pandemic. Read our latest article below to ensure you are up to date with the latest information...
Are there any changes are taking place?
Under the current rules, companies are required to offset a trading loss in the current year against other profits from the same accounting period. Thereafter they are able to carry unused losses back to offset against profits from the twelve months preceding. Sole traders and partnerships, otherwise known as unincorporated businesses, are able to offset trading losses against income from the same year as the loss(es), the previous year or both.
There are no proposed changes to these rules, however, an extension to the period for which certain trading losses can be carried back was announced on 3rd March 2021. Rather than it being just one year before the loss, the new rules state that losses can be carried back a further two years.
So, what are the new rules, exactly? It is worth mentioning that the extended carry back relief applies only to trading losses. Companies are eligible to claim carry back relief for accounting periods where the year-end falls between 1 April 2020 to 31 March 2021 and 1 April 2021 to 31 March 2022.
Trading losses in these periods can be carried back and offset against total profits from the previous three years. Companies are still able to carry an unlimited amount of trading losses back to the previous year. After this, unused losses carried back to the two earlier years, capped at £2,000,000 for each year.
For unincorporated businesses trading losses for 2020-21 and 2021-22 tax years are eligible for extended carry back. As with the normal rules, losses incurred in these years can be offset against general income from the twelve months before, but if extended carry back is applied, the losses can only be offset against trading profits from the two earlier years. An unlimited level of trading losses can be offset against the previous year, and unused losses carried back to the earlier two years is, as with companies, capped at £2,000,000 for each year.
The extended carry back will make a temporary revision to section 37 of the Corporation Tax Act 2010 (for companies) and section 64 of the Income Tax Act 2007 for unincorporated businesses.
Since 2020-21 was anything but normal, businesses are likely to be continuing with their recovery in 2021-22 and may still suffer losses in this year. By extending the carry back period beyond twelve months, businesses are more likely to find profits against which they can offset their more recent losses.
As such, this announcement will be welcome news for many companies and unincorporated businesses alike. The government expects these measures to impact businesses positively by easing the financial pressures they are currently facing, assisting cash flow and allowing greater scope for recovery. In the majority of cases, the measures are not expected to create an administrative burden for businesses which outweighs the benefits they will generate.
HMRC will need to make some significant internal changes to IT systems to accommodate the changes when returns are filed, which, along with operational changes required, are expected to cost the government £17m to implement. The measures will be monitored along with the government's other measures introduced as part of the Coronavirus support package and any changes required will be communicated in due course. However, as it stands, these measures are due to be in place until 2022.
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