Extension to Corporation Tax Carry Back Loss Relief

For Corporation Tax, current law is contained in section 37 Corporation Tax Act 2010. A company incurring a trading loss in an accounting period can make a claim to offset the loss against total profits of the previous 12 months after first having set the losses against any profits of the accounting period in which the loss occurred.

However, Finance Bill 2021 introduced legislation, which subsequently received Royal Assent on 10th June, to temporarily extend the period in which losses could be carried back.

This blog will look at the reasons behind this change, it’s practical implication and key considerations for the small business owner.

Why has the period been extended?

The Covid Crisis has caused financial uncertainty worldwide. With lockdowns ceasing trade overnight, illness decimating workforces and the shear scale of the crisis meaning there was literally nowhere to hide it has been incredibly tough for businesses to survive. For those that have manged to weather the storm, they are battered and bruised and will need assistance to get back on their feet.

Under normal circumstances the provisions within the Corporation Tax Act for 2010 aim to rationalise the tax burden on businesses who are experiencing profit volatility. The ability to carry back losses to their prior profit-making period, resulting in a cash refund, ensures that businesses are not penalised unduly for making profits and receive a much-needed cash bonus when things are tough.

These measures are simply insufficient in a post covid world, where the sheer scale of the crisis has created huge losses which cannot be fully relieved in the prior 12 months at a time when businesses are desperate for cash to survive.

By extending the period in which losses can be relieved from 1 year to 3 years, the legislation increases the chances of more losses being relieved and therefore a greater cash injection being generated.

What does this mean in reality?

For incorporated businesses, the extension applies to trading losses made by companies in accounting periods ending between 1 April 2020 and 31 March 2022, the predicted duration of the crisis.

Carry back to the preceding year remains unlimited, but a maximum of £2,000,000 of unused losses will be available for carry back against profits of the same trade to the earlier 2 years. This cap applies to each of the accounting periods included in the above time frame.

The £2,000,000 cap will be subject to a group-level limit, requiring groups with companies that have capacity to carry back losses more than a de minimis of £200,000 to apportion the cap between its companies.

Claims must be made within two years of the end of the accounting period in which the loss being carried back arises. However, it is worth noting that if the claim is £200,000 or lower, it can be submitted before the tax return is due, in effect expediting the much-needed cash injection.

An example may help:

In the year ending 31 st March 2020, XYZ Ltd made profits of £2m. They paid tax on these profits at 19%, resulting in a cash outflow of £380’000.They had been maintaining profits at this level for the previous 3 years.

In the year ending 31 st March 2021, XYZ Ltd made losses of £4m. Under previous legislation, they could only carry back to the prior year so only £2m of the loss could be claimed resulting in a cash injection of £380’000. The remaining £2m of loss would be carried forward and claimed the following year, assuming the previous level of profits was restored. This means the potential cash injection of £380’000 would not be received for a considerable period of time.

Under the new legislation, the full £4m of losses can be claimed against the profits of both years ending 31st March 2020 and 31 st March 2019. This results in a cash injection of £760’000 at a time when it is most needed.

What do I need to consider?

For small business owners and their advisors, there are a couple of things to think about. Firstly, it would be prudent to prioritise finalising year end accounts for the relevant accounting periods to see if you can take advantage of the being able to claim for losses below £200k before the tax return is due.

Secondly, whilst the thought of a cash injection right now is tempting, we must also consider corporation tax for all companies with profits in excess of £50,000 will increase to 25% from 1 April 2023. This means any losses generated now could in theory be worth more if carried forward and used against profits incurred after 1 st April 2023.

For the example above, If the additional £2m of loss carried back 2 years resulting in a cash injection of £380’000 was in fact carried forward and claimed against the profits in the year ending 31 st March

2024 it could be worth £500’000, raising an additional £120’000.

If these changes affect your business and you want to make sense of it all, please get in touch and book in discovery call. We’d be delighted to chat through any thoughts or issues with you.