Meg Saksida explains why a valuable measure for business owners was introduced and how it may affect you.
The pandemic has affected all walks of life, both with the obvious physical manifestations of the disease but also with the more insidious impact on the UK economy.
Helping business owners
The government has introduced several measures to assist individuals and businesses who have suffered economic hardship from the impact of the virus. Announced in March 2021, this extension of the carry-back of losses for unincorporated businesses and companies is one of these, and it is expected to cost the government over £1 billion in 2020/21 and 2021/22. This measure is hoped to ease the financial pressures on owners and help them keep their businesses afloat, ultimately helping the UK economy.
The problem businesses are facing is that as a result of several lockdowns and curtailed movement and spending of the population, some businesses have experienced a significant reduction in demand for their products or services, causing or worsening their trading losses. This causes a chain reaction impacting the supply chain of the business, which has led to several more businesses suffering increased trading losses.
In an attempt to improve the cashflow of the affected unincorporated businesses, for tax years 2020/21 and 2021/22 the government has introduced additional relief for trading losses which will possibly deliver repayments of taxes that have already paid, for an extra two years.
Unincorporated businesses
Currently, if an unincorporated business suffers a loss, they can offset the loss against their net income in the current year and the previous year in either order, including both years. This loss relief in an ongoing business is unlimited if it is offset against trading profits. There are limits on the offset if the trading loss is offset against other general income, which currently is a maximum of £50,000 or 25% of adjusted total income.
The new measure retains the unlimited nature of the loss relief from trading profits for the current year and the previous year; but rather than limiting the relief to these years, it extends the loss relief back two more years. This means the proprietor can claim to offset from the current year and the previous three years, rather than the previous one year.
The process of offsetting the loss relief to these additional two years is called the ‘extended carry-back’. Losses carried back as part of the extended carry-back are not unlimited, but are subject to a £2 million cap; so loss relief applied in 2020/21 and 2021/22 will be unlimited for the current and previous years but restricted if carried back to the extended two years. This £2 million cap will be applied to the unused losses of each tax year separately and will be offset against the later years before the earlier years in order. Any losses over £2 million will be carried forward.
Other points
- The unincorporated businesses affected include furnished holiday lettings, as income from these is counted as trading losses for income tax purposes.
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For partners, the £2 million cap is applied to the individual rather than to the partnership.
Practical tip
The time limit for making a claim is the anniversary of 31 January after the tax year of the loss. For example, a claim for 2020/21 will need to be made by 31 January 2023 and for 2021/22 by 31 January 2024. It is in the interests of the business to make the claim as early as possible, to maximise the cashflow benefit from the tax repayment.
