Budget 2021: Extended carry back for trading losses
Last week the Chancellor announced an extended period in which to carry back trading losses. Katherine Ford explains what this means for businesses that pay income tax.
To recap on the existing rules for losses available to sole traders and individual partners:
- Losses may be set it against “net income” of the same tax year and/or the previous tax year – in the order the taxpayer chooses (ITA 2007 s64). Once the income of the specified year has been used in full to relieve the loss, any remaining loss can be set against capital gains of the same tax year (ITA 2007 s71, TCGA 1992 ss 261B-C). There are various restrictions, for example: uncommercial trades, farming losses, non-active traders and traders using the cash basis.
- Traders who make a loss in their first four tax years of trading, can set that loss against their 'net income' of the three preceding tax years, using the losses in the earliest years first (ITA 2007 s72).
- Any loss not used above is carried forward where it must be deducted against the first available profits of the same trade (ITA 2007 s 83).
- The terminal loss which arises in the final 12 months of trading can be carried back and set against profits of the same trade for the year of cessation and the three previous tax years. The loss is set against trade profits of later years before earlier years (ITA 2007 s 89).
Relief for any tax year against net income (sideways relief) under points (1) and (2) above, other than the s71 relief against capital gains, are subject to the £50,000 or 25% of net income cap (ITA 2007 s24A). The use of losses in items (3) and (4) above are not subject to this cap because they are only used against profits of the same trade.
Losses arising in the 2020/21 and 2021/22 tax years can be carried back against profits of the same trade of the three previous tax years. This means the £50,000 or 25% of income cap will not apply.
Carried back losses will be set against later years’ profits before those of earlier years.
Taxpayers must be entitled to make a claim under s 64 ie relief is not restricted (see Finance Bill 2021 Sch 2 para 3). The trader is expected to make a s64 claim first (see 1 above) for at least one of the two years and only then can the unrelieved loss be carried back further under these new provisions.
A maximum of £2m of losses (this is the unrelieved loss after the s64 claim) for each of the two tax years, 2020/21 and 2021/22, can be carried back under these provisions. If the unrelieved losses are more than £2m, the excess will be carried forward. There is an example showing how this cap works towards the end of the detailed guidance note. There will be no limits at partnership level.
Options for each tax year
HMRC says that the options for loss relief will be:
Losses arising in 2020/21
- If s64 relief is claimed only against the 2020/21 net income, the remaining loss can be carried back against the trade profits of 2019/20, 2018/19 and 2017/18.
- If s64 relief is claimed against 2019/20 net income, or against the net income of both 2019/20 and 2020/21, the remaining loss can be carried back against the trade profits of 2018/19 and 2017/18.
- If a s64 claim is not possible because the trader has no other income in either 2019/20 or 2020/21, the loss can still be carried back against past profits of 2018/19 and 2017/18.
- The £2 million cap does not apply to a 2020/21 loss that is carried back and set against 2019/20 profits of the same trade.
- This relief for a 2020/21 loss must be claimed by 31/1/2023.
Losses arising in 2021/22:
- If s64 relief is claimed only against the 2021/22 net income, the remaining loss can be carried back against the trade profits of 2020/21, 2019/20, and 2018/19.
- If s64 relief is claimed against 2019/20 net income, or against the net income of both 2020/21 and 2021/22, the remaining loss can be carried back against the trade profits of 2019/20 and 2018/19.
- If a s64 claim is not possible because the trader has no other income in either 2020/21 or 2021/22, the loss can still be carried back against past profits of 2019/20 and 2018/19.
- The £2 million cap does not apply to a 2021/22 loss that is carried back and set against 2020/21 profits of the same trade.
- This relief for a 2021/22 loss must be claimed by 31/1/2024.
Watch the covid grants
Taxpayers who received any Covid grants for their business (the full list is at FA 2020 s106(2) and includes SEISS, CJRS receipts as an employer, and business support grants), these form part of their trading income.
The grants are taxable in the tax year of receipt regardless of what the client’s basis periods are for 2020/21 and 2021/22 (FA 2020, sch 16, paras 1(2) & 3(3)). This will affect the calculation of the trading losses for these two tax years.
This article has been amended following publication of the 2021 Finance Bill.