For many businesses, the pandemic has turned the world on its head, with many who might have expected to be profitable experiencing a loss.
Sometimes, losses happen simply because the business is in its early stages or because certain costs have arisen that were not anticipated.
However, Covid-19 has thrown yet another dimension into the mix, with thousands of companies failing to turn a profit thanks to closures and restrictions placed on their business.
Relief is now available via an extension to the carry back scheme which was announced by the Government as part of the Budget, back in March.
For accounting periods ending between 1 April 2020 and 31 March 2022, carry back relief will be extended to three years, with most recent years profits taking precedence.
Why do trading losses occur?
Trading losses occur if the expenses and costs of a business are more than its income for a particular accounting period. Losses are calculated in the same way that you work out your yearly profits.
Under general rules, businesses can carry back trading losses from one year and offset them against profits in the previous year. This reduces the amount of profit to be taxed for the previous year, resulting in a lower Corporation Tax bill.
In most instances, the business will have already paid its tax bill for the previous year and so can claim a reimbursement of the Corporation Tax or Income Tax that it paid.
Example:
- The business made a loss of £7,000 in the accounting period 1 January 2018 to 31 December 2018, and a profit of £19,000 in the previous 12 months.
- Under the carry back rules, the company’s £7,000 loss can be offset against the profits for the previous accounting year.
- It reduces the previous year’s profit from £19,000 to £12,000. Lower profit means less tax, but because the business has already settled its liability in full on the £19,000 total, the company will receive a rebate for the difference.
The Chancellor announced a temporary extension to the carry back period, from one to three years, for trade losses of up to £2 million (adjusted for groups of companies), for two years.
Groups with companies that have the capacity to carry back losses in excess of a minimum of £200,000 will be required to apportion the £2m cap.
Hayley Huckle, chartered accountant and portfolio manager at George Hay, comments: “This measure will provide a welcome cashflow benefit to businesses, both incorporated and unincorporated, who have suffered increased trading losses as a result of the Covid-19 outbreak, by potentially generating repayments of tax paid for two additional years.
“For many, this could be a really worthwhile exercise at a challenging time.”
More details can be found in HMRC’s policy paper.
How can George Hay help?
If you have increased trading losses that could be offset against previous year’s profits, we encourage you to speak to your usual George Hay adviser who will be able to discuss with you what the implications are for your organisation.
If you don’t currently have the support of an accounting professional or business adviser, contact one of our three offices in Cambridgeshire, Bedfordshire or Hertfordshire to find out more about how we could work with you.
Link: Changes to the reform of loss relief rules for Corporation Tax
