The budget introduced new rules allowing greater flexibility for claiming relief for trading losses for the 2020/21 and 2021/22 tax years. For many farming businesses the 2020 harvest was poor and these rules may give scope for earlier use of any losses. Similarly for holiday letting businesses or other diversified activities such as wedding venues that run as a standalone trade and were forced to close for much of the 2020 season, this may give an immediate use of the losses. It may also help those businesses that choose to invest in new plant and machinery to take advantage of the increased capital allowances.
For partnerships and sole traders, trading losses can be set against other income in the same year or they can be carried back one year. Under the new rules they can now be carried back a further two years, but only against profits of the same trade, up to a maximum of £2 million. The losses can also be offset against profits for the purposes of calculating Class 4 national insurance. For the 2020/21 tax year this means that losses can be set against profits arising in 2019/20, 2018/19 and 2017/18. The losses must be set against the most recent year before the earlier years, with any unused losses carried forward to offset future profits. The extended relief will apply to qualifying furnished holiday lets as well as to the farming and other trading activities.
Where losses are set against other income they are restricted to £50,000 or 25% of total income, whichever is higher. There are no changes to this restriction as a result of this extended relief.
Similar rules are in place for companies but for groups the £2 million has to be split between all companies in the group.
Claims will normally be made through the tax return but can be made directly to HMRC once the accounting period has ended and the losses have been calculated. For companies, claims to offset losses above £200,000 must be made through the company tax return.
For help calculating any losses and making the claim please get in touch with your usual Hazlewoods contact.