Corporation Tax Losses Carry Back
Corporation tax losses carry back is extended for a further 2 years, find out how would you be able to benefit from it and what are the conditions to be entitled to the scheme in this article.
The chancellor has proposed a two-year provisional expansion of the carried back period from one to three years for trading losses up to £2 million (adjusted for Group of companies that has been discussed below).
You may recall that a similar measure for bringing back corporate losses applied to businesses for trade losses incurred between November 2008 and November 2010, but the regulations are more complex this time.
This measure would offer a welcome cashflow benefit to companies, both incorporated and unincorporated, who have suffered capital losses due to the COVID-19 outbreak by extending the carry back relief for those losses, resulting in tax repayments for two additional years.
Separately, a range of amendments are being made to the regulations that limit relief for corporation tax losses carried forward in order to reduce administrative costs for businesses and ensuring that the legislation performs as proposed.
Current law (Section 382)
A company that incurs a trading loss during an accounting period,can make aclaim to offset (deduct) the loss against total profits for the previous 12 months.
An individual who incurs a trading loss during a tax year may file a claim to cover the loss against the person's net income for the current year, the previous year, or both years.
Finance Bill 2021 will provide legislation to expand the duration over which trade expenses will be carried out against previous earnings.
This measure would refer to company accounting periods ending between 1 April 2020 and 31 March 2022, as well as unincorporated corporation tax years 2020 to 2021 and 2021 to 2022.
In short, Trade losses carryback will be extended from one-year entitlement to three years, with losses carried back against later years being carried back first.
Time period for filing claims
Claims for more than the £200,000 de-minimis cannot be filed by the end of each financial year, i.e., from March 31, 2021 for FY2020 and March 31, 2022 for FY2021. The amendments required as a result of the implementation of Corporate Capital Loss Restriction (CCLR) to include/refer to capital loss restriction in S296ZF(3) CTA 2010 and s188DD will be viewed as having already been in force since the introduction of CCLR on 1 April 2020.
It is worth knowing what Group of companies is meant by the law before digging further.
The definition of a group is dependent on the businesses that are members of the group as of March 31, 2021 and March 31, 2022.
- You need to prepare a “loss carry-back allocation statement” from a nominated organisation as per HMRC`s requirements. IF in the group claims to carry back a loss that exceeds the £200,000
- The £2m group limit would not apply if all group companies took back losses of no more than £200,000 per entity. This means that losses of more than £2 million will be carried back three years.
The proposed amendments will be effective for accounting years starting on or after April 1, 2021:
- group relief forcorporation tax losses carried-forward.
- amendment to correct a group relief circularity issue.
- amendment to the time limits and requirement to submit a group allowance allocation statement.
- the amendment of the formula for allocation of the deductions allowance
The relief is limited to £2 million in unused losses each year.Groups with companies that are capable to carry back losses ofmore than a de minimis of £200,000 would allocate the £2 million limit.The maximum cashflow value for classes of businesses is £760,000 (£2 million at 19% for two years), but claiming the expanded relief is likely to be worthwhile for several.
If a corporation leaves the group during any financial year with the intention of increasing the amount of relief under these laws, anti-avoidance regulations apply.
HMRC's policy paper contains more details. There have been developments in a variety of ways, including:
- Transfer of a trade where there has been a change of ownership;
- Group relief;
- Loss restriction computation; and
- The deductions allowance, including the group allocation statement.
Four examples have been provided by the HMRC for a better understanding.
- Two examples include for a standalone company.
- One for the group cap
- One for the £200,000 de minimis.