Based on the budget, an announcement was said that loss relief provisions available to both unincorporated businesses and companies would be temporarily extended. There are differences in the way this will operate between the two types of business vehicle.
Unincorporated businesses
The affected rules are those in ITA 2007, s. 64, i.e. “sideways” loss relief. This permits a trader to set off losses suffered in a tax year against the same year’s general income, the preceding year, or both years. This is not automatic and must be claimed, or the loss will carry forward to offset future profits. There are variations on this relief in the early or final years of trading. It is also possible to set off losses that cannot be utilised under as. 64 claim against capital gains.
The current rules are subject to the general restriction on uncapped income tax reliefs. They offset against income other than profits from the same trade, e.g. in the preceding tax year. The maximum that can be used in any tax year is the higher of £50,000 or 25% of adjusted total income.
The extension provides a restricted enhancement to s. 64 for losses realised in 2020-21 and 2021-22. This means that the individual must first claim s. 64, or be eligible to make one but has not done so as there is no other income to relieve. The extension then permits the trader to offset the same trade’s profits in the three preceding tax years. The most recent year is to be relieved first.
Note that this does not extend to offsetting general income. There will be a cap of £2 million applying to each of the tax years included in the extension.
The published guidance gives the following example:
An individual trader’s profits, losses and other income are:
2017 to 2018 – Trade Profit £1,200,000 – Employment Income £50,000
2018 to 2019 – Trade Profit £1,200,000 – Employment Income £50,000
2019 to 2020 – Trade Profit £500,000 – Employment Income £50,000
2020 to 2021 – Trade Loss £3,000,000 – Employment Income £50,000
The trader claims section 64 of ITA07 to set the 2020 to 2021 loss against general income of both the year of loss (£50,000) and the previous year 2019 to 2020 (£550,000).
The remaining part of the 2020 to 2021 loss, up to a maximum of £2,000,000, is available to carry back to set against trading profits of 2018 to 2019 and 2017 to 2018 (in that order), and the trader claims the new provision.
Loss set against:
1) £50,000 general income of 2020 to 2021
2) £550,000 general income of 2019 to 2020
3) £1,200,000 trade profit of 2018 to 2019
4) £800,000 trade profit of 2017 to 2018 (cap applied)
£400,000 of the loss remains available to be claimed to carry forward and set against trade profits in future years.
Companies
The affected rules are those in CTA 2010, s. 37. When a company makes a trading loss in an accounting period, it may be relieved by claiming loss relief against total profits in the accounting period. Unrelieved losses may then be set off against profits of the preceding 12-month period. The temporary extension increases the carry back period to three years for losses arising in accounting periods, ending between 1 April 2020 and 31 March 2022. There is a £2 million cap on losses made in accounting periods, ending between 1 April 2020 and 31 March 2021. With a separate £2 million cap in place for trading losses, incurred in relevant accounting periods, ending between 1 April 2021 and 31 March 2022. This cap will apply at the group level where applicable.
As the Budget announced the future increase to the corporation tax’s primary rate to 25% in 2023, it may be more efficient for a loss-making company to carry its losses forward. Utilising profits that would be chargeable at the increased rate, will of course, depend on the current cash flow.
