The corporation tax loss carry back rules have been temporarily extended; trading losses can now be carried back to the previous three years rather than one year. Tim Palmer outlines the position.
If a company has made a trading loss in an accounting period that ends between 1 April 2020 and 31 March 2022, loss relief has been extended. The trading loss can now be carried back three years against their total profits; investment income, capital gains, and trading profits (i.e., against everything) for the three previous years. There will be a £2m cap for trading losses carried back for more than one year. However, losses carried back one year are unlimited, as per current legislation.
When a company makes a trading loss in an accounting period that ends between 1 April 2020 and 31 March 2022, it can make the extended claim. These temporary rules only apply to trading losses, not to other company losses such as capital losses, property losses and deficits on non-trading loan relationships which a company may have incurred.
It should be noted that an accounting period’s trading loss ended in this period is restricted to a loss carry back maximum of £2m to years two and three in total, for that particular lossmaking accounting period.
Example 1: Loss carry back periods
-
Year ended 30 June 2020 (£2m) trading loss carry back maximum (to years two and three)
-
Year ended 30 June 2021 (£2m) trading loss carry back maximum (to years two and three)
However, losses carried back one year are unlimited, as per current tax legislation. The special temporary rules are only available to a company which is continuing to trade. The company with the trading loss must first set it against its other income and gains (if it has any) for the loss making accounting period. Only once it has done so that can it elect to carry the loss back against profits of previous periods.
Example 2: Maximum extended loss carry-back
X Ltd, for the year ended 31 December 2021, has a trading loss of £6m. It has no other income or gains.
Results: Total profits
2020 £3.2m – (£3.2m) loss = NIL
2019 £1.8m – (£1.8m) loss = NIL
2018 £600,000 – (£200,000 max) = £400,000 chargeable profits
The company will carry forward the remaining (£800,000) loss to 2022 against total profits.
Example 3: Profits and losses
Y Ltd: Trading Position
|
Results |
£ |
|
Y/E 30 June 2021 |
(5,540,000) |
|
Y/E 30 June 2020 |
(2,125,000) |
|
Y/E 30 June 2019 |
1,100,000 |
|
Y/E 30 June 2018 |
3,225,000 |
|
Y/E 30 June 2017 |
1,375,000 |
The loss for the year ended 30 June 2020 (£2,125,000) can be carried back and wipe out the profits in full of the year ended 30 June 2019 of £1,100,000. The balance of the loss (£1,025,000) can be carried back against the year ended 30 June 2018, leaving chargeable profits of £2,200,000 for 2018.
The loss for the year ended 30 June 2021 can be carried back to 2018 and (£2,000,000) can be set against the £2,200,000 profits for 2018, leaving £200,000 chargeable for that accounting period.
The balance of the loss (£3,540,000) will be carried forward to 2022 against total profits.
Corporation tax losses
Extended corporation tax loss carry back claims are needed to be made in the corporate tax return. However, claims below a de-minimis limit of £200,000 can be made outside of a return.
Accordingly, a corporation tax loss claim of up to £200,000 can be made in respect of an accounting period without having to submit its corporate tax return. If a company wants to make a loss claim exceeding £200,000, it will have to make it in its company tax return.
Practical tip
Unfortunately, during these very difficult Covid times, some companies have accumulated big trading losses. Careful consideration must be undertaken, with the losses being claimed and applied correctly.
