Announced as part of the Spring Budget earlier this year, Finance Act 2021 has introduced rules that temporarily allow for trading losses to be carried back for an extended period of up to three years. It’s a measure that is intended to boost businesses who may have struggled during the Covid-19 pandemic and will allow additional tax relief “of up to £760,000” on the basis that the rules apply for losses made in the two financial years 2020-21 and 2021-22 – although see to the definition of “relevant accounting periods” below – but relief is limited to a maximum of £2 million per year.
The existing corporation tax rules for carrying back trading losses are included within CTA 2010 s37 which states that, upon making a claim, losses arising in a trade may be relieved against total profits of the current accounting period and then, provided the company was carrying on the same trade, against total profits arising in the preceding 12 months. The claim must generally be made within two years of the end of the loss-making period.
The wording of this section in unchanged by the new rules. Instead, paragraph 4 of Schedule 2 FA 2021 treats the reference to 12 months as being three years in respect of losses arising in a relevant accounting period. A relevant accounting period is one which “ends in the period beginning with 1 April 2020 and ending with 31 March 2022.”
The cap to £2 million of relief per financial year is applied to companies who are not a member of a group under paragraph 5, and for companies who are under paragraph 9. For group members, the cap applies across the group, subject to a £200,000 de minimis rule for each individual company. Paragraph 11 enables HMRC to require groups to prepare a Loss carry-back allocation statement (see below).
Similar rules are introduced for unincorporated businesses in respect of ITA 2007 s64.
Regarding the claims process, HMRC published guidance earlier this month advising that:
“Claims that exceed a de minimis of £200,000 must be made in a company tax return. Box 45 (claim or relief affecting an earlier period) on the CT600 should be completed and details of the carry back claims included in the computations that accompany the CT600 and accounts.
There is no need to submit amended returns for the earlier periods to which the extended relief applies as the claims will be treated as amendments to those returns. Amended returns for these periods will be rejected for online submission as, in most cases, they will be out of time for amendment.
Claims below the de minimis limit of £200,000 may be made outside of the company tax return.
Claim guidance is available for extended loss carry back for businesses.
Further guidance on Corporation Tax calculating and claiming a loss is also available.”
Loss carry-back allocation statement
Secondary legislation relating to the loss carry-back allocation statement was published in June as The Corporation Tax (Carry Back of Losses: Temporary Extension) Regulations 2021, SI 2021/704.
These rules allow a group of companies to appoint a nominated company in respect of the 2020 and 2021 financial years. This nomination may be made by the ultimate parent, all members of the group together, or two or more members of the group with the consent of the ultimate parent.
The nominated company is then able to submit a loss carry-back allocation statement to HMRC on behalf of the group. This statement must list:
- The ultimate parent of the group
- The members of the group
- Each company making a de minimis claim and the amount of the claim
- The total amount of de minimis claims
- Each company making a non-de minimis claim and the amount of the claim (may not exceed £2 million in total)
The statement must be delivered the HMRC in writing by 31 March 2023 in the case of the 2020 version of the statement, and 31 March 2024 for the 2021 version. An amended return may be made provided it is received by HMRC within this same timeframe.
Claims to carry back trading losses in Alphatax have always been based upon manual entries, with users expected to enter equal inputs for:
- The amount Carried back in the accounting period of the loss, and
- The amount Brought back in the period in which the losses are being offset
While this does require double entry, leaving this in the hands of users (rather than automatically posting entries) has generally been accepted as the best approach. This is partly because shorter accounting periods can lead to overlapping, making the entries required more involved, and some companies may decide not to amend the earlier period meaning that only one entry is required.
The benefit of this approach here though is that Alphatax already allows users to reflect the effect of the three year carry back rules with no tax rules changes required. In the V21.0 edition of Alphatax, we did introduce a small narrative change to the Trade losses carried back under s37(3)(b) CTA 2010 input on the trade Losses input statement to serve as a reminder for users that extended relief is available from that period.
As is ever the case in the world of corporation tax, for a change that appears to be reasonably simple in principle there are several complexities to be aware of in practice. And while the additional flexibility on carrying-back losses will be welcome – perhaps lifesaving for some – with the rate of corporation tax already legislated (FA 2021 s6) to increase to 25% from 1 April 2023, many will be weighing up whether it would be better to look forward rather than back.