Sarah Bradford looks at how companies can take advantage of the limited-time extension to the carry back period for certain losses.
Many companies have suffered losses because of the impact of the Covid-19 pandemic. Where a company has suffered a loss, if it has made a profit previously or will do so again in the future, it is possible to obtain relief for that loss.
There are various ways in which this can be achieved, the main ones being setting the loss against total profits of the same accounting period, carrying the loss back against total profits of the previous accounting period, or carrying it forward and setting it against future profits of the same trade. Special rules apply to losses made in the opening years of the business, and in the final year.
The options for utilising losses are increased for a limited period with the introduction of an extended carry back period for certain losses. This can be a useful option as it may enable the company to secure a much-needed tax repayment at a time when they are struggling.
Normal carry back rules
Under the normal rules for carrying back a loss, a company that incurs a trading loss in an accounting period can make a claim for that loss to be set against total profits of the same accounting period. To the extent that any of the loss remains available, it can be carried back and set against the total profits of the preceding 12 months.
This is subject to the condition that the company was carrying on the same trade as that which gave rise to the loss in the accounting period or periods that fall in the previous 12 months.
If an accounting period straddles the preceding 12 month period, the profit is apportioned and the loss which is carried back can only be set against those profits which fall within the preceding 12 months.
It is important to note here that the relief for a trading loss is given against total profits, including chargeable gains. This can be valuable.
Example 1: Loss offset in the previous accounting period
A Ltd prepares accounts to 30 December each year. In the year to 30 December 2020, the company had a trading loss of £80,000. It also realised a capital gain of £10,000.
In the year to 30 December 2019, the company made a profit of £40,000. No chargeable gains were realised in the period.
In the first instance, A Ltd can set the trading loss of £80,000 for the year to 31 December 2020 against the chargeable gain of the same period, reducing total profits to nil. This leaves a loss of £70,000 available for relief.
The company can make a claim to carry back £40,000 of the loss 12 months and set against the profits of £40,000 for the year to 31 December 2019. This will reduce the profits for that period to nil, triggering a corporation tax repayment of £7,600 (i.e., £40,000 @ 19%), plus repayment supplement.
Under the ‘normal’ rules, A Ltd would need to carry forward the remaining loss of £30,000 for set-off against future profits.
Extended carry back
To help companies who are struggling because of the impact of the Covid-19 pandemic, losses for accounting periods which end between 1 April 2020 and 31 March 2022 can be carried back for three years, rather than for the usual one. The loss must be set against the profits of the most recent year first.
However, while there is no limit on the amount of the loss which a company can carry back and set against profits of the previous 12 months, there is a cap on the loss that can be carried back under the extended carry back rules to the earlier two years of the three-year carry back period. This is set at £2 million for all relevant accounting periods that end in the financial year 2020 (i.e., accounting periods ending between 1 April 2020 and 31 March 2021). A separate cap of £2 million applies to losses for all relevant accounting periods ending in the financial year 2021 (i.e., accounting periods ending in the period from 1 April 2021 to 31 March 2022). For companies that are part of a group, the cap applies to the group as a whole, rather than to each individual company.
Claims for relief under the extended carry back rules must be made in the company return. However, where the claim is below a de minimis limit of £200,000, it can be made outside the company tax return. This means that the company does not need to wait until they submit their return before making the claim, allowing them to receive any corporation tax repayment sooner.
Example 2: Extended carry back of loss
The facts are as in Example 1, but A Ltd chooses to make use of the extended carry back rules. It had profits of £70,000 in the year to 31 December 2018 and £64,000 for the year to 31 December 2017.
The loss for the year to 31 December 2020 falls within the period 1 April 2020 and 31 March 2020. It is a loss for an accounting period that ends in the financial year 2020. Consequently, relief is available under the extended carry back provisions.
The loss has already been used in part against profits of the same accounting period (i.e., the year to 31 December 2020) and the previous accounting period (i.e., the year to 31 December 2019). Under the extended carry back rules, the remaining loss can be carried back and set against the profits of the year to 31 December 2018 and, if any loss remains available, against the profits of the year to 31 December 2017.
The unrelieved loss is £30,000. A claim is made under the extended loss relief rules to carry the loss back and set it against the profits of the year to 31 December 2018, reducing them to £40,000 and triggering a corporation tax repayment of £5,700 (i.e., £30,000 @ 19%), plus repayment supplement. Making the claim extinguishes the loss.
A Ltd makes a further loss of £57,000 for the year to 31 December 2021. As this accounting period also falls within the period to which the extended loss rules apply, the company explores whether it can make a claim. It has no chargeable gains or interest in the year to 31 December 2021, so total profits are nil. Under the normal rules, the loss can be carried back 12 months against any profits for the year to 31 December 2020. However, as the company made a trading loss for that year, and a previous claim has extinguished the capital gain, a claim is not possible.
Under the extended carry back rules, a claim can be made against the profits for the year to 31 December 2019 and then against those of the year to 31 December 2018.
The profits for the year to 31 December 2019 have already been extinguished.
However, a claim is made to set £40,000 of the loss against the unrelieved profits for the year to 31 December 2018, triggering a corporation tax repayment of £7,600 (i.e., £40,000 @ 19%), plus repayment supplement.
The remaining loss of £17,000 cannot be used under the extended carry back rules, so it must be carried forward.
Order of set-off
The order in which the loss must be used is prescribed in the legislation; losses must be set against later years before earlier years. This rule limits the relief that can be obtained under the extended carry back rules.
As shown in Example 2, it is not possible to set the loss of the year for the year to 31 December 2020 against the profits for the year to 31 December 2017 rather than those for the year to 31 December 2018, leaving the profits for the year to 31 December 2018 available to mop up more of the loss for the year to 31 December 2021.
Consider the rate of corporation tax
The general rule when seeking to maximise loss relief is to get relief as early as possible and at the highest rate possible.
For companies with profits in excess of £50,000, the rate of corporation tax will increase from 1 April 2023. If a company expects to return to profit, they may wish to carry the loss forward to obtain relief at a higher rate, rather than carrying the loss back.
Practical tip
Consider whether it is beneficial to make use of the extended carry back period for corporate losses to generate a tax repayment.
