Extended trading losses carry-back – what does this mean for your business?

To help businesses recover from the impact of the Covid outbreak, the Chancellor recently announced a temporary extension to how far back companies can carry back trading losses to offset historic profits.

20 May 2021

Pound Coins - Money

Welcome news for loss-making businesses struggling with the economic effects of the Covid 19 Pandemic.

To help businesses recover from the impact of the Covid outbreak, the Chancellor recently announced a temporary extension to how far back companies can carry back trading losses to offset historic profits. Companies who have incurred trading losses in financial years 2020-21 and 2021-22 will be able to carry back the losses from one to three years.

We ask Mike Baker, Legal and Commercial Manager at ABGI-UK, how the changes might affect your business:

Who can benefit?

All companies and unincorporated businesses making losses from carrying on trades, professions or vocations.

What's the difference?

In a nutshell, loss making companies are now getting an additional two years of repayments of tax paid.

Currently, companies can carry back unlimited losses against total profits of the previous 12 months. This would generate a Corporation Tax reimbursement.

Under the new temporary measure, for accounting periods ending in the period 1 April 2020 to 31 March 2022, after carrying back losses to the previous 12 months, a company can then also carry back up to a maximum of £2,000,000 of unused losses against profits of the same trade to the earlier 2 years.

Is there a limit to what can be carried back?

The amount of trading losses that can be carried back to the preceding year remains unlimited. After that, each accounting period for a company falling within the window will have a £2,000,000 cap and the cap is subject to a group-level limit (if applicable).

What are the benefits to businesses?

This new measure will provide welcome additional cashflow to companies which have suffered increased trading losses as a result of the COVID-19 pandemic, by generating repayments of corporation tax for 2 additional years.

What are the benefits to businesses claiming R&D tax credits?

Loss-making SMEs that are looking to generate cash from R&D claims for those relevant accounting periods should consider this option, rather than automatically surrendering those losses in that period for a tax credit. This will be particularly relevant to those companies who have only recently started to incur losses when they had previously been profitable.

A full explanation of the amendments to the carry back rules, and how businesses will be affected, can be found on HMRC’s website.

If you have any questions on how the temporary extension of trading losses carry-back might impact your business, or your R&D tax relief claim process, please contact us.

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