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PBR 2008: New loss rules – the details

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28th Nov 2008
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We have had an extension of the loss carry back rules before when the economy is under pressure, but I suspect none so well timed in the announcement than this. By getting the announcement out as we head into the worst of the recession, rather than waiting until it is almost over, Government shows that it is thinking quite clearly about what should be done for businesses (at least on some issues!).

So what do the new rules have to offer, and what should we be watching carefully for? I will explain the proposals separately for companies and income tax businesses, as there are some crucial differences in the way the rules are likely to operate. My commentary draws on the detail in PBRN 03, and the supplementary technical summary in the document entitled “Extension of loss relief rules – carry back of trading losses”.

Companies

Companies will be permitted to carry trading losses arising in accounting periods ending between 24 November 2008 and 23 November 2009 back against total taxable profits of the three preceding years. This relief will operate alongside the current 12 month carry back, which has always been available. Losses will be set against the most recent periods first, only going back to earlier periods when the profits of the later year have been exhausted.

There is a cap of £50,000 (in total) on the losses carried back to the earlier two years of the three (years one and two), but no restriction on the relief against the latest year (year 3) as relief would in any event have been available under existing loss relief rules.

Normally when the period of carry back is extended in this way, the terminal loss relief rules become redundant, but because of the £50,000 cap, it is possible that terminal loss relief will be preferable if a company has ceased trading as a result of losses. Note that the loss would also be computed differently for terminal loss relief. The new relief takes the simple trading loss for an accounting period (after capital allowances have been deducted).

The cap operates in relation to annual profits, so if the period producing the loss is shorter than 12 months, the £50,000 cap is adjusted accordingly.

It is likely that advisers will need to be aware of those clients who may be in need of this relief and be alive to the option of amending accounting dates in order to secure early relief for losses : an example will illustrate.

A Limited has an accounting date of 31 December. In the year ended 31 December 2008 (the accounting period covered by the new rules) the company incurs a modest loss of £2,000 which is all set against the profits of the preceding period – year ended 31 December 2007. Profits in 2007 were £10,000.

A Limited estimates that losses in the year ended 31 December 2009 will be of the order of £60,000. Given the facts above it is clear that there is no opportunity for A to obtain relief for this loss, and it would have to be carried forward against future profits of the same trade. There is, however, the option to change accounting date to, for example, 31 October 2009. This would bring the ten month period of account within the window for the extended loss carry back, providing access to any profits earned in 2006, and the remaining profits in 2007. The £50,000 cap would be adjusted pro rata as the loss producing period is less than 12 months long.

Claims will be made in the return for the loss making period, and in corporation tax a one year carry back reduces the tax payable at the date it was due, thus eliminating interest charges on any late paid tax. The additional carry back claims do not eliminate interest charges from earlier years, but will prompt a repayment of corporation tax paid. Repayment supplement will not run retrospectively on the older tax repayments.

Income tax businesses

The rules for income tax businesses are largely similar to the corporation tax rules, but there are some very important key differences. The £50,000 cap and the principle of addressing more recent years first is common to both regimes.

The extended loss relief is available for losses incurred in accounting periods forming the basis period for 2008/09. This is likely to present an issue for businesses which come late to the recession, and particularly when the accounting date is early in the fiscal year. A further example would be useful :

Fred Bloggs has incurred a trading loss for the year ended 30 June 2008 (the basis period for 2008/09) of £5,000 after capital allowances. Fred elects to set the loss against the total income of 2007/08 under Section 64 ITA 2007. No claim is made for 2008/09 because the other income of the year is fully covered by personal allowances. Profits in year ended 30 June 2007 were a healthy £30,000.

But Fred’s business is still in the down spiral, and the result for the year ended 30 June 2009 is a loss of £40,000. Fred does not have the extended relief available to him, as this period forms the basis period for 2009/10.

Fred’s option might be to prepare accounts for the nine months to 31 March 2009 to secure a further period of account within the relevant tax year and seek additional relief as a result.

The method of relief is also different for income tax businesses, as the extended loss carry back is only against profits of the same trade and not total income. For companies the relief is given against total taxable profits, bringing in rental income etc for relief. This is probably not a really big practical issue, but it is a point to watch. On the other hand, it does leave non trading income in charge to cover personal allowances. The new rules also require that the appropriate claims under Section 64 are made before the new rules will be available. Although too detailed to go into here, there would seem to be some quite complex arrangements under which various claims could be made and other income preserved in some cases. More detailed analysis of this point can follow later when claims are lining up.

Finally, the date of a claim for income tax purposes. The claim can be made once the accounting period producing the loss has ended. A stand alone claim might be appropriate to claim relief for earlier years, but repayments cannot be made in any event until after Budget Day 2009, when the measure will become effective. Provisional claims can be submitted once the accounting period has ended with a view to finalising the repayment as soon as possible after Budget Day 2009. Note that as usual, a claim to carry back a loss will not affect the tax payable for an earlier year, but will create a tax credit in the year of claim. These will be repaid once the claim has been formalised.

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