Introduction
The government introduced legislation in Finance Act 2021 that provides a temporary extension to the loss carry back rules for trading losses of both corporate and unincorporated businesses.
Existing Rules
Under the existing rules in section 37 Corporation Tax Act (CTA) 2010, a company incurring a trading loss in an accounting period may make a claim for that loss to be set off against total profits of the same accounting period.
Additionally, it can claim for the unused balance of such losses to be set off against total profits of the preceding 12-month period (provided that the company was carrying on the same trade in the accounting period or periods which fall in that 12-month period).
Where an accounting period straddles the preceding 12-month period, the profit is apportioned and losses can only be set off against profits falling within the 12-month period.
Alternatively, a trading loss may be carried-forward and set against trading profits or set against total profits of subsequent accounting periods depending on whether the losses are pre or post 1 April 2017 trade losses.
Terminal Loss Relief
Companies that cease to trade additionally have access to Terminal Loss relief (section 39 CTA10) which allows unlimited carry back of trading losses of the final accounting period to set off against profits of the previous 3 years (provided that the company was carrying on the trade in the accounting period or periods which fall in that 3-year period).
Extended Loss Relief
The current rules allow trading losses to be carried back one year without restriction.
For accounting periods ending between 1 April 2020 and 31 March 2022, this is extended to three years, with losses required to be set against profits of most recent years first before carry back to earlier years.
There is no change to the current one-year unlimited carry back of trade losses, however, for the extended relief, the amount of loss that can be carried back to the earlier 2 years of the extended period is capped for those 2 years.
This is a cap of £2,000,000 of losses for all relevant accounting periods ending in the period 1 April 2020 to 31 March 2021 (financial year 2020).
A separate cap of £2,000,000 applies for all relevant accounting periods ending in the period 1 April 2021 to 31 March 2022 (financial year 2021). Groups are subject to a group cap of £2,000,000 for each relevant period.
Extended loss carry back claims must be made in a return, however, claims below a de minimis limit of £200,000 may be made outside a return.
This means that any stand-alone or group company with losses capable of providing relief up to a maximum of £200,000 of losses, may make a claim in respect of a relevant accounting period without having to wait to submit its company tax return.
Any stand-alone company or group company wishing to make a claim exceeding £200,000 must make the claim in their company tax return.
Groups are subject to a group cap of £2,000,000 where any company is able to make a claim that exceeds the de minimis. Any de minimis claims for the relevant period will be taken into account in determining the total amount available for any claims in excess of the de minimis.
Examples
Example 1
Company A has current year (CY) trading losses of £3,300,000 and profits of previous periods as follows:
CY-1 — £1,100,000
CY-2 — £1,750,000
CY-3 — £1,250,000
Current rules which allow £1,100,000 of CY trading loss to be carried back to CY-1 remain unaffected and therefore uncapped.
The legislative changes allow Company A to carry back £1,750,000 (limited to the profits of the period) of CY trading loss to CY-2 and £250,000 (limited to unused amount of the £2,000,000 losses available for carry back) of loss to CY-3. These claims exceed the de minimis of £200,000 and must therefore be made in a return.
The remaining £200,000 of CY trade loss will be carried forward under current rules for relief under s45A and s45B CTA 2010.
Example 2
Company B has current year (CY) trading losses of £2,125,000 and in the subsequent year (CY+1) has trading losses of £5,550,000. Its profits of the preceding years are as follows:
CY-1 — £1,100,000
CY-2 — £3,225,000
CY-3 — £1,175,000
The CY losses may be carried back to CY-1 to set against the £1,100,000 profits in full as current rules permit. The remaining £1,025,000 can be set against the profits of CY-2 under the new rules, leaving remaining profits of £2,200,000.
The CY+1 losses cannot be carried back to CY as there are no profits in that year but the new rules now allow them to be carried back further against CY-1 and CY-2. The CY-1 profits have been relieved in full by the CY losses so the only remaining period that may be relieved by losses of CY+1 is CY-2. £1,025,000 of the profits of CY-2 have been relieved by losses of CY leaving £2,200,000 available for relief. A maximum of £2,000,000 may be relieved under the new rules. The remaining £3,550,000 unrelieved losses of CY+1 will be carried forward for relief under s45A and s45B CTA 2010.