At Relative, we can help businesses navigate the complex tax system to ensure you are aware of any tax relief entitlements, such as temporary enhanced loss carry backs, if your company has suffered any loss in trade over the last 12 months due to the Covid-19 pandemic.
In the recent Budget in March, the government announced a temporary two-year extension to the trade loss carry back period for both Corporate Tax and Income Tax.
The extended loss carry back for businesses has gone from one to three years for losses of up to £2 million. The extended relief for those losses will help generate repayments of tax paid for an additional two years and will have a significant impact on businesses that have suffered increased trading losses due to the Covid-19 pandemic.
What do temporary enhanced loss carry backs mean for my business?
If a company or unincorporated businesses have made a profit loss during an accounting period, they are eligible to make a claim for that loss and offset it against their total profits of the same accounting period.
Current rules state that trading losses can be carried back one year without restriction, however the new guidelines will provide a three-year extension for accounting periods ending between 1 April 2020 and 31 March 2022, enabling businesses to set their trading losses against total profits of earlier accounting periods up to the capped amount.
Under the new rules, there will be a cap of £2 million of losses for the relevant accounting period, 1 April 2020 to 31 March 2021 (financial year 2020). A separate cap of £2 million also applies for accounting periods ending in the period 1 April 2021 to 31 March 2022 (financial year 2021). A £2 million cap is also available for a group of companies.
To reduce profits to nil, companies and unincorporated businesses will be able to carry back as much as they need. Any losses carried back to the previous two years will be capped equal to the lower of total profits over the two-year period or up to £2 million. Unused losses can still be carried forward.
Who will it benefit from temporary enhanced loss carry backs?
If your business was profitable before the pandemic but has suffered losses over the last 12 months, then this announcement will be of significant benefit. You will be able to carry back losses for three years and take advantage of immediate cashflow, which will be of huge benefit for your business as we emerge out of lockdown restrictions in June.
How much tax will I be entitled to?
The tax position of your business will determine the potential repayment of tax. If you are able to fully utilise the £2 million allowance for both accounting periods, you could be set to receive accelerated tax relief of £760,000.
When will it come into effect?
To generate tax repayments to assist cashflow during these uncertain times, businesses are being urged to submit their tax returns as early as possible after the end of their tax year to take advantage of the extension.
Business can make a claim for the 2020/21 tax year by 31 January 2023 and for 2021/22 by 31 January 2024.
However, guidance on repayments and the loss carry backs extension cannot be made until the Finance Bill 2021 receives royal assent, which is likely to take a few months. This delay could severely impact struggling businesses. Clarity is also needed around how losses are determined, depending on where a companies year end falls, as well as how claims can be made.
For support on claiming tax benefits, head here, e-mail hello@itsrelative.co.uk or call 01484 441431.