For many businesses, the pandemic has turned the world on its head, with many who might have expected to be profitable experiencing a loss.
Sometimes losses happen simply because the business is very new, or because costs have unexpectedly risen.
However, COVID-19 has thrown another dimension into the mix, seeing thousands of companies fail to turn a profit due to closures and restrictions placed on their business.
Relief is now available through an extension to the carry back scheme, which the Government announced as part of the Budget earlier this year.
For accounting periods ending between 1 April 2020 and 31 March 2022, this will carry back relief be extended to three years, with losses required to be set against profits of most recent years first before carry back to earlier years.
Trading losses occur if the expenses and costs of a business are more than its income for a particular accounting period. Losses are calculated in the same way that you work out your yearly profits.
Under general rules, businesses can carry back trading losses from one year and put them against profits in the previous year. This reduces the amount of profit for the previous year – less profit generally means a lower Corporation Tax bill.
But because the business has already paid its tax bill for the previous year, it can then claim a reimbursement of the Corporation Tax or Income Tax that it paid in the previous year.
Here is an illustrative example of carry back losses:
- The business made a loss of £7,000 in the accounting period 1 January 2018 to 31 December 2018, and a profit of £19,000 in the previous 12 months.
- Under the carry back rules, the company’s £7,000 loss can be offset against the profits for the previous accounting year.
- It reduces the previous year’s profit from £19,000 to £12,000. Lower profit means less tax, but because the business has already paid tax on the full £19,000, the company gets a rebate for the difference.
The Chancellor announced a temporary extension to the carry back period from one to three years for trade losses of up to £2 million (adjusted for groups of companies), for two years.
This measure will provide a welcome cashflow benefit to businesses, both incorporated and unincorporated, who have suffered increased trading losses as a result of the COVID-19 outbreak by providing extended relief for those losses, thereby generating repayments of tax paid for two additional years.
The relief is capped at £2 million of unused losses per year. Groups with companies that have the capacity to carry back losses in excess of a minimum of £200,000 will be required to apportion the £2 million cap.
For groups of companies the maximum cashflow benefit is £760,000 (£2 million at 19 per cent for two years) so claiming the extended relief is likely to be a worthwhile exercise for many.
Details can be found in HMRC’s policy paper.