Temporary Extension To Carry Back Of Trading Losses

9th Apr 2021
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The carry back rules were temporarily amended as part of the Chancellor’s Spring Budget. See how the changes may affect your clients.

A helping hand for COVID-weary businesses

The main aim of every company is obviously to make a profit - but it’s not always possible.

Carrying back trading losses can be helpful and may benefit your clients who are struggling, particularly in the wake of COVID-19. Here we take a look at how it works, plus the extension the Chancellor made to the scheme in his Spring Budget.

The carry back rules as they stand

Where a company has made a loss it can carry its losses back against the profits of a previous year. This would generate a Corporation Tax reimbursement. However, losses can only be carried back to the 12 months prior, and only if the same trade is being continued. Where a period is shorter or longer, an apportionment will need to be made as losses can only be carried back for a year maximum.

How a claim is made under the carry back rules

The carrying back of a trading loss will need to take place within two years of the end of the accounting period during which the loss occurred. It’s generally submitted as part of a company’s tax return (or as an amendment to their tax return).

When it comes to timescales there is some flexibility offered by HMRC under certain circumstances. However, this depends on an array of varying factors so it’s really best to assume the two year rule is the one to stick to.

Changes made to the carry back rules during the Chancellor’s Spring Budget

During his Spring Budget statement on the 3rd March 2021, Chancellor Rishi Sunak confirmed plans to make certain adjustments to the carry back rules going forward. The primary one is that an extension is now to be implemented, extending the carry back period temporarily from one year up to three for losses of £2 million or less (adjusted for groups). The extension is due to last two years.

The changes have been largely welcomed by businesses, with vast swathes of the economy suffering hardship on the back of COVID-19 restrictions. Helping to boost shorter term cashflow, the move also means the extended relief will bring about repayments of tax paid for two additional years. Furthermore, a number of other amendments were proposed that it’s hoped will lessen the administrative burden on businesses and assist them in accessing the reliefs they so badly need in these challenging times.

What do the changes mean in practice?

Sunak’s amendments to the carry back rules therefore mean that a company’s trading losses that occurred in accounting periods ending 1st April 2020 to the 31st March 2022 (and by unincorporated businesses during 2020/21 and 2021/22) can be carried back for three years instead of the usual one year. Losses are carried back against the most recent year first before working backwards.

Note that a cap of £2 million of unused losses will apply per year. If a company is part of an umbrella group that’s seeking to carry back losses over a de minimis of £200,000, it must apportion the £2 million cap. In other words, the maximum cashflow benefit for groups is £760,000 (£2 million at 19% for two years). So clearly for the majority of companies it’s well worth claiming.

A more detailed explanation of the amendments to the carry back rules, and how businesses will be affected, can be found in HMRC’s policy paper. Looking through it is time well spent in flagging up the changes with your clients, especially as other improvements were made at the same time in:

  • Group relief
  • Transferring a trade where there’s been a change of ownership
  • The deductions allowance, including the group allocation statement
  • Loss restriction computation

It is possible to claim early?

Yes, but it’s not quite as straight-forward as that.

Claims made under the carry back rules are usually made when a company submits its tax return. This can be a bit of a headache for some companies, especially if their tax return isn’t due to be submitted for many months. Companies may therefore decide to apply as soon as possible in order to benefit more quickly. All well and good - but…

There’s actually no statutory provision allowing a company to carry back its losses before the latest tax return has been submitted. So firms wishing to claim early must approach HMRC and request to amend their tax return for the previous year (or the last year in which a profit was made). It requires evidence (lots of it) to demonstrate that losses will be included for the loss-making period when their tax return is eventually completed.

Making a carry back claim early isn’t a new thing and many organisations have found it useful to make their claim ahead of time. It’s likely to become more common during the aftermath of the coronavirus pandemic and in the coming few years while companies try to get back to normal.

Be mindful of any coronavirus government supports though

When discussing the carry back rules with any of your clients, make a point of asking them if they’ve received any COVID-19 support from the government. If they have (for instance, SEISS CJRS receipts as an employer or business support grants) they will need to include it as part of their trading income.

Businesses that have received government support during the pandemic will need to declare it in the tax year they received it. Obviously this will then affect their calculation of trading losses for the 2020/21 and 2021/22 tax years.

Contact us

Looking to find out more about how the carry back rules work with regard to R&D Tax Credits? Perhaps you’d like to understand more about what affect state aid rules can have on a claim?

Get in touch with our team of R&D tax and funding experts by using our contact page or by calling 0207 118 6045. Also see how your firm could partner with us to offer your clients a more complete R&D tax and innovation funding service.