The Chancellor announced, as part of his Budget 2021 speech, a temporary extension to the loss carry back rules for companies, partnerships and sole traders.
From April 2021, it will be possible to carry back trading losses for accounting periods ending between 1 April 2020 and 31 March 2022, by up to three years, as opposed to the current one year carry back rule.
This measure will help businesses that have suffered financial losses during the coronavirus pandemic by receiving relief for those losses sooner, giving businesses a cashflow benefit by providing tax repayments for earlier years.
Trading losses carried back under the new measure will be capped at £2 million for accounting periods ending in the 2020/21 tax year and a separate cap of £2 million will also apply for accounting periods ending in the 2021/22 tax year. Groups of companies will have a total cap of £2 million for each period rather than on a per company basis.
This could mean a cash refund of up to £760,000 per business/group if full relief is taken for both accounting periods.
Under current rules, there is no limit to the amount of trading losses that can be carried back to the prior year for companies. For individuals, there is a restriction against the amount of trading profits that can be offset against general income (i.e. the higher of £50,000 or 25% of adjusted total income) but no restriction applies for offset against profits of the same trade.
Under the proposed rules, trading losses can be carried back for offset against profits of the same trade only. It is not possible to offset the trading losses against other gains or income. There will be no change to the restriction for individuals and this will not be relevant for the extended carry back given that this is not permitted against general income. The loss must be offset against general income as far as permitted in the current and prior accounting period before an extended carry back claim can be made.
For example, a company makes a trading loss of £5,500,000 in 2020/21. It has other non-trading profits of £500,000 for the same period and therefore will have up to £5 million of unutilised losses available to carry back. Example trading profits and available carry back claims have been set out below.
| Accounting period |
Trading profits |
Available loss carry back |
| 2019/20 |
£2,500,000 |
£2,500,000 (unrestricted) |
| 2018/19 |
£1,500,000 |
£1,500,000 |
| 2017/18 |
£1,500,000 |
£500,000 (capped) |
This would leave £500,000 of losses for carry forward and offset against trade profits in future years. If the company made a further loss in 2021/22 there would be no further loss carry back available. Unfortunately, it is not possible in the example above to carry back the losses to 2017/18 in preference of 2018/19 to then leave profits available in that period for offset against a 2021/22 loss. The extended relief has to be applied to the most recent year first.
Where the loss carry back is for £200,000 or less, the claim can be made outside of the return (i.e. once the accounting period in which the loss has been realised has ended but prior to submission of the return). For losses above this de minimis amount, the claim must be made within the tax return.
Companies must make a loss carry back claim within two years of the end of the accounting period in which the loss has arisen. Unincorporated businesses will have until 31 January 2023 to make a claim for the 2020/21 tax year and 31 January 2024 for losses arising in 2021/22.
With corporation tax rates set to rise to 25% from April 2023, consideration should also be given to the benefit of carrying these losses forward for utilisation after this date. We can assist you with calculating the most tax efficient option for utilisation of losses, subject to there not being an immediate cashflow need within the business.