Has your company made a trading loss due to covid? You could claim back some tax

The UK government has announced various assistance packages to help businesses cope with the impact of the Covid pandemic. One important measure is the temporary extension of the loss carry back rules for UK companies. If you run a limited company and have made a loss either this year or last, here we take a look at how you could benefit from these rule changes.

What are the loss carry back rules?

Loss carry back rules mean that, if you make a trading loss in a particular year, you can apply that loss to the prior year’s profits. As a result, you’ll then get a refund of tax paid in the previous year.

What’s changed?

To help businesses through the pandemic, the UK Government is allowing UK companies to carry back trading losses for three years rather than the usual 12 months (similar rules also apply for sole traders). This can provide a valuable cash flow boost for relevant loss-making businesses.

How do I calculate my loss?

A company suffers a trading loss when its trading expenses are greater than its trading income. To calculate the loss, you start by looking at the company’s accounting profit or loss figure and then adjust this for various tax rules. 

This is because an accounting loss is not the same as a tax allowable loss. Check which expenses can be claimed as part of your loss and which are excluded. 

What options do I usually have to use my loss?

If your company has suffered a loss, you will have several options:

1. Set the trading loss against total profits in the current accounting period (where you have other non-trading income).
2. Carry the trading loss back and set it against total profits in the previous 12 months.
3. Carry forward the trading loss, when made after 1 April 2017, and set this against total profits of a later period.

Some care is needed for trading losses before 1 April 2017 as different rules apply, or for losses which arise when a company ceases to trade or belongs to a group or consortium.

What additional options do I have now?

Thanks to the new rule change, in addition to the above options, where your company incurs trading losses for periods ending between 1 April 2020 and 31 March 2022, these losses can be carried back for three years, with the losses being set against later years first.

How can I claim for a trading loss?

A claim for trading losses forms part of the company’s tax return and HMRC has advised that claims that exceed £200,000 must be made in the company tax return. Claims below £200,000 may be made outside of the company tax return.

A number of restrictions apply in respect of the three-year carry back rules, so it is important to check these prior to making a claim. For example, the amount of loss that can be carried back to the earlier 2 years of the extended period is capped at £2,000,000 of losses for all relevant accounting periods ending in the period 1 April 2020 to 31 March 2021.

Where a company is a member of a corporate group, additional considerations would apply.

Conclusion

For what would initially seem like a simple change, there are several complications to keep in mind. While greater flexibility is welcome, with Corporation Tax set to rise from 19% to 25% in April 2023, companies will need to weigh up the benefits of claiming a tax refund now or carrying forward the loss which may attract relief at 25%.

From April 2023, the government will introduce a new Small Profits Rate of 19% for companies with annual profits of £50,000 or less. For companies with profits between £50,000 and £250,000, they will pay tax at the main rate of 25% reduced by a marginal relief providing a gradual increase in their tax rate.

It should be noted that the above information is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayers’ circumstances do vary, and businesses should always seek professional advice before dealing with Corporation Tax.

About TaxAssist Accountants

This article was written by TaxAssist Accountants – the UK’s largest network of accountants providing tax advice and accountancy services specifically for sole traders, partnerships, limited companies and personal taxpayers.

With more than 410 TaxAssist Accountants offices nationwide, the network provides accountancy services, tax returns, payroll, bookkeeping, tax savings and tax advice to 78,000 customers. To arrange a free initial consultation please click here.

Disclaimer

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

The views expressed here belong to the author and do not represent those of Funding Circle. Funding Circle is not authorised to, and does not, provide investment, tax, legal or regulatory advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, such information contained here. If you have any questions, please speak to your professional adviser or seek independent specialist advice.