The rules for setting business losses against earlier profits were temporarily extended in first Budget of 2021. The government has now published detailed guidance on how the new rules will work and the extension applies to losses of both companies and unincorporated businesses.
Normally businesses can only set losses against the profits of the previous year. However, trading losses of unincorporated businesses for the tax years 2020/21 and 2021/22 can additionally be carried back against profits of the two previous years. Companies benefit from three-year carry back for losses in accounting periods ending between 1 April 2020 and 31 March 2022.
Losses carried back must be set against more recent years before earlier years. The carry back of losses to earlier tax years is capped, adding a layer of complication
For companies the maximum losses that can be carried back beyond one year for accounting periods ending between 1 April 2020 and 31 March 2021 is £2m. A separate £2m cap applies for losses of accounting periods ending from 1 April 2021 to 31 March 2022.
Groups are subject to a group cap of £2m for each period. Where group losses are capped, a nominated company must submit an allocation statement to HMRC showing which companies have been allocated amounts of the £2m cap. Group losses are not capped if no company in the group carries back £200,000 or more, even if total claims exceed £2m.
Claims must be made in a company tax return, although claims below £200,000 may be made outside a return. This allows companies with relievable losses up to £200,000 to obtain relief more quickly.
For unincorporated businesses there was already a limit on trading losses (and certain other reliefs) that can be carried back against general income, namely the higher of £50,000 or 25% of adjusted total income. This has not changed.
The extended rules allow unrelieved trading losses of tax years 2020/21 and 2021/22 to be carried back and set against profits of the same trade for three years before the tax year of the loss. This relief is capped at £2m for each of these tax years.
Two ways to make claims
Claims are normally made in a tax return but advance stand-alone claims are possible. The deadline for making a claim to the extended relief for a trading loss in tax year 2020/21 is 31 January 2023.