Introduction

Many businesses have and will incur unexpected losses due to the COVID-19 pandemic. To boost the cash flow of these businesses, the Chancellor of the Exchequer announced in his March 2021 Budget that the trading loss carry-back rule is being temporarily extended from the existing one year period to three years. The extended loss carry-back provisions were a specific recommendation of this Institute in its July 2020 “The Next Financial Year” position paper.

This measure is designed to allow for much earlier recognition and extended relief for trading losses which should lead to an improved cash flow position for businesses through tax refunds that may have been unavailable otherwise. The rules have now been enacted in legislation in Schedule 2 Finance Act 2021.

This article examines the rules for both unincorporated businesses and companies.

Unincorporated businesses

Under section 64 ITA 2007, a trading loss for a particular tax year can be set against general income of the same loss-making tax year and/or the previous tax year. However, there is a cap on the amount of certain income tax reliefs, including trade loss relief against general income, that can be used to reduce taxable income – this is the higher of £50,000 or 25 percent of adjusted total income.

The temporary extension to the period over which trading losses can be carried back applies to losses arising in the 2020/21 and 2021/22 tax years. A claim for relief must be made on or before the first anniversary of the normal self-assessment filing date for the relevant tax year.

Trading losses arising in these tax years can therefore be carried back against trading profits of the same trade arising in the previous three tax years with losses being carried back against later years first on a LIFO basis.

Key features are as follows:-

• If they can, taxpayers are expected to make a claim first under section 64 (subject to the cap on certain income tax reliefs) to set trading losses against general income of the same loss-making tax year and/or the previous tax year, before carrying back losses under the extended carry back provisions. This is likely to result in the personal allowance for those tax years being wasted (see Example 1);
• After a section 64 claim has been made, a maximum of £2 million of losses can be carried back under the extended provisions;
• A £2 million limit applies separately to each of the tax years 2020/21 and 2021/22;
• The excess for the relevant tax year will be carried forward;
• Taxpayers are not subject to a partnership level limit. The limit applies at the individual level;
• The extended carry-back is only available against trading losses and therefore the cap on certain income tax reliefs does not apply;
• There is no change to other loss reliefs available. For example, if there are no trading profits in earlier years against which to set a trading loss, the trading loss remains available for carry forward and offset against future trading profits;
• The extended carry-back also applies for the purposes of calculating trading profits in respect of which Class 4 NIC is due.

All examples herein are based on HMRC guidance.

Example 1

Moira Peters’ trading profits, losses and other income in recent years are as follows:

2017/18 – Taxable trading profit £1,200,000 and employment income £50,000

2018/19 – Taxable trading profit £1,200,000 and employment income £50,000

2019/20 – Taxable trading profit £500,000 and employment income £50,000

2020/21 – Tax adjusted trading loss £3,000,000 and employment income £50,000

Moira must make a section 64 claim first to set the trading loss in 2020/21 against general income in 2020/21 and 2019/20 as follows:

Moira has a minimum cap on income tax reliefs in 2020/21 of £50,000, hence the full amount of her employment income is reduced to nil. This will result in her 2020/21 personal allowance being wasted as an all or nothing claim is required.

*Full relief is available in respect of the trading loss carried back against the £500,000 trading profit as this is not subject to the cap. Moira’s cap in 2019/20 is £137,500 (being the greater of £50,000 and 25% x £550,000) therefore her £50,000 employment income can also be covered by the section 64 claim.

After the section 64 claims have been made, the unrelieved loss is £2.4 million. £2 million of this loss is available to carry back against trading profits in 2018/19 and 2017/18 (in that order) as follows:

Moira’s £50,000 employment income remains taxable.

Due to the £2 million cap, £400,000 of trading profits remain taxable, in addition to her £50,000 employment income.

£400,000 of the 2020/21 trading loss are available to carry forward for offset against trading profits in future years. Tax refunds of income tax and Class 4 NIC (where applicable) will be generated in respect of each loss relief claim made.

Companies

For accounting periods ending between 1 April 2020–31 March 2021 and 1 April 2021–31 March 2022, trading losses of companies can be carried back three years against total profits.

Key features are as follows:-

• The one-year carry back of trading losses against total profits under section 37(3)(b) CTA 2010 continues without restriction;
• For extended loss carry-back, trading losses must be set against total profits of later years first on a LIFO basis;
• The amount of loss that can be carried back to the earlier two years of the extended period is capped for each of those 2 years;
• This is a cap of £2,000,000 of trading losses for all relevant accounting periods ending in the period 1 April 2020–31 March 2021 (financial year 2020);
• A separate cap of £2,000,000 applies for all relevant accounting periods ending in the period 1 April 2021–31 March 2022 (financial year 2021);
• If an accounting period is less than 12 months, this cap is not pro-rated;
• There is no change to the other loss reliefs available. For example, if there are no profits in earlier years against which to set a trading loss, the trading loss remains available for carry forward and offset against total profits in future tax years, subject to the loss restriction rule which may restrict relief for losses carried forward;
• Extended loss carry-back claims must be made in the company’s corporation tax return; however, claims below a de-minimis of £200,000 may be made outside the return. This enables companies to make smaller claims to generate a refund without having to wait to submit their corporation tax returns; and
• The deadline for making extended carry-back claims is two years from the end of the accounting period in which the trading loss arises.

Example 2

Shackleton Limited’s trading results in recent years is as follows:

Accounting period ended

31 March 2018 – Taxable trading profit £1,175,00031 March 2019 – Taxable trading profit £3,225,000

31 March 2020 – Taxable trading profit £1,100,000

31 March 2021 – Tax adjusted trading loss £2,125,00031 March 2022 – Tax adjusted trading loss £5,550,000

Each accounting period is 12 months in length.

31 March 2021 trading loss

This loss may be carried back to the accounting period ended 31 March 2020 without restriction, relieving the profits for this year in full. This leaves £1,025,000 of losses which can be carried back to the accounting period ended 31 March 2019 under the temporary extended carry-back rules.

The £2 million cap does not apply to the carry back to 2020 as carry-back to the previous 12 months is unrestricted. Nor does it apply to the carry back to 2019 as the amount carried back is less than £2 million.

31 March 2022 trading loss

Profits for accounting period ended 31 March 2020 have been relieved in full therefore the only remaining period which losses can relieved in is the accounting period ended 31 March 2019 as this is the final and earliest accounting period in which the 3 year carry back is possible.

After the carry-back claim in respect of the trading loss in the 2021 accounting period, £2,200,000 (£3,225,000 – £1,025,000) of profits are unrelieved in 2019. However, due to the application of the cap, a maximum of £2,000,000 of losses may be relieved under the extended carry-back rules. This leaves £3,550,000 of unrelieved losses to be carried forward from 2022.

As the extended loss relief claims made in respect of 2019 are in excess of £200,000, the loss relief claims must be made in the corporation tax returns for the loss-making years.

Groups of companies

Companies that are members of a corporate group can obtain relief for up to £200,000 (de-minimis threshold) of losses for accounting periods ending between 1 April 2020–31 March 2021 and 1 April 2021–31 March 2022 without any group limitation. A group cap of £2,000,000 applies for each relevant accounting period ending between 1 April 2020–31 March 2021 and 1 April 2021–31 March 2022, where the group makes claims exceed the de-minimums threshold.

The mechanics of the group cap are as follows:-

• The definition of group applicable when considering the group cap is the normal 75 percent test for group relief purposes;
• The members of the group are considered to be those within the group at 31 March 2021 and at 31 March 2022;
• Where the group cap applies, a nominated company must submit an allocation statement to HMRC showing how the cap has been allocated among group companies;
• The group reporting requirements will not be triggered if all companies in the group make de-minimis claims;
• The group cap will also not apply if all group companies are only able to make de-minimis claims, even if the claims exceed £2,000,000 in total;
• Any company in the group with a claim of £200,000 or less may make their claims outside of their corporation tax return; and
• The de-minimis does not apply to companies that have the capacity to carry back losses exceeding the de-minimis who reduce their claims beneath the de-minimis by surrendering losses as group relief. For example, if a company has losses of £500,000 but surrenders £350,000 as group relief, leaving £150,000 to carry back, the de-minimis threshold will be exceeded and allocation of the group cap will be required.

Example 3

Companies A, B, C, D and E are in a group relief group. In the 12 month accounting period ended 31 March 2022 the companies have the following tax adjusted trading losses:

A Ltd £150,000

B Ltd £150,000

C Ltd £200,000

D Ltd £200,000

E Ltd £1,500,000

A Ltd, B Ltd, C Ltd and D Ltd have losses beneath the de-minimis threshold and so are able to make claims outside their corporation tax returns to accelerate repayments of corporation tax. E Ltd has losses in excess of the de-minimis. This has the following consequences:

• The £2 million cap applies to the group as a whole;
• Assuming the other companies make extended loss carry back claims for all of their losses (£700,000 in total), the group cap will restrict the amount E Ltd can relieve to £1,300,000;
• E Ltd must claim relief for these losses via its corporation tax return; and
• The group must submit an allocation statement.

Conclusion

The rules are complex and require careful consideration and calculation of the most optimal position for the business. For groups of companies the maximum cashflow benefit is £380,000 for each relevant accounting period (£2 million x 19 percent corporation tax saved) so claiming the extended relief is likely to be a worthwhile exercise for many who have incurred losses due to the pandemic.

Leontia Doran is UK Taxation Specialist with the Advocacy and Voice Department of Chartered Accountants Ireland. Email: leontia.doran@charteredaccountants.ie