Foreword

The Government introduced legislation in Finance Act 2021 that provides a temporary extension to the loss carry back rules for trading losses of both corporate and unincorporated businesses.

This Guidance note gives details of the rules.

In respect of unincorporated businesses, any reference to a trade includes a reference to a profession or vocation, and any reference to a person carrying on a trade includes those doing so in a partnership.

Questions or comments on this note may be addressed to:

Technical Issues — Companies

Eva Upali
Tel: 03000 542 465
Email: eva.upali@hmrc.gov.uk

Technical Issues — Unincorporated Businesses

Daniel Shaw
Tel: 03000 511 123
Email: daniel.shaw@hmrc.gov.uk

Chapter 1 — Companies

Current Rules

Under the existing rules in section 37 Corporation Tax Act (CTA) 2010, a company incurring a trading loss in an accounting period may make a claim for that loss to be set off against total profits of the same accounting period.

Additionally, it can claim for the unused balance of such losses to be set off against total profits of the preceding 12-month period (provided that the company was carrying on the same trade in the accounting period or period(s) which fall in that 12-month period). Where an accounting period straddles the preceding 12-month period, the profit is apportioned and losses can only be set off against profits falling within the 12-month period.

Alternatively, a trading loss may be carried-forward and set against trading profits or set against total profits of subsequent accounting periods depending on whether the losses are pre or post 1 April 2017 trade losses. These losses may also be subject to restriction on the amount of profits that can be offset. This is broadly that, where profits exceed £5 million, only 50% of these profits are available for offset by carried-forward losses (see sections 45, 45A and 45B CTA 10). Any losses that are carried-forward from earlier periods cannot be carried back.

Companies that cease to trade additionally have access to Terminal Loss relief (section 39 CTA10) which allows unlimited carry back of trading losses of the final accounting period to set off against profits of the previous 3 years (provided that the company was carrying on the trade in the accounting period or period(s) which fall in that 3-year period). Where an accounting period straddles the 3-year period, the profit is apportioned and loss can only be set off against profit falling within the 3-year period.

Summary

Broadly speaking, the current rules allow trading losses to be carried back one year without restriction. For accounting periods ending between 1 April 2020 and 31 March 2022, this is extended to three years, with losses required to be set against profits of most recent years first before carry back to earlier years.

There is no change to the current one-year unlimited carry back of trade losses, however, for the extended relief, the amount of loss that can be carried back to the earlier 2 years of the extended period is capped for those 2 years. This is a cap of £2,000,000 of losses for all relevant accounting periods ending in the period 1 April 2020 to 31 March 2021 (financial year 2020). A separate cap of £2,000,000 applies for all relevant accounting periods ending in the period 1 April 2021 to 31 March 2022 (financial year 2021). Groups are subject to a group cap of £2,000,000 for each relevant period.

Extended loss carry back claims must be made in a return, however, claims below a de minimis limit of £200,000 may be made outside a return. This means that any stand-alone or group company with losses capable of providing relief up to a maximum of £200,000 of losses, may make a claim in respect of a relevant accounting period without having to wait to submit its company tax return.

Any stand-alone company or group company wishing to make a claim exceeding £200,000 must make the claim in their company tax return.

Groups are subject to a group cap of £2,000,000 where any company is able to make a claim that exceeds the de minimis. Any de minimis claims for the relevant period will be taken into account in determining the total amount available for any claims in excess of the de minimis.

Detail

As with the current one-year carry back, the extended loss relief is limited to trading losses. The trading losses in question can be carried back against total profits of earlier accounting periods up to the capped amount.

As is the case with existing terminal loss relief rules, losses must be carried back in order, with set off against profits of the most recent year before earlier years, for example loss from Current Year (CY) to be carried back to CY-1 before CY-2 or CY-3 and to CY-2 before CY-3.

Carry back of losses from the current accounting period (CY) to the previous year (CY-1) remains unchanged and is uncapped. However, the extended loss carry back to CY-2 and CY-3 is capped at a total of £2,000,000 of loss per relevant accounting period (subject to the group cap -see below for further detail). If an accounting period ending within the duration of this proposed extension of relief is less than 12 months, there is no pro-rating of the cap.

All other current loss reliefs will remain available. For example, if a claim under the new relief is not possible because there are no profits in earlier years against which to set a loss, any unrelieved loss will remain available to set against trading profits in future tax years.

The existing restrictions that apply to loss relief claims in Part 4 of CTA 2010 will also apply to losses for the purposes of the proposed relief.

The extension applies to companies within the oil and gas ring fence regime. Trading losses made on ring fence activities can be carried back, subject to the £2,000,000 cap, against all profits (within and without the ring fence).

There are no changes to group relief rules so any losses carried back cannot displace existing group relief claims. The time limit for making or withdrawing group relief claims remains 2 years from the end of the relevant accounting period.

Stand-alone Company

Example 1

Company A has current year (CY) trading losses of £3,300,000 and profits of previous periods as follows:

CY-1 — £1,100,000
CY-2 — £1,750,000
CY-3 — £1,250,000

Current rules which allow £1,100,000 of CY trading loss to be carried back to CY-1 remain unaffected and therefore uncapped.

The legislative changes allow Company A to carry back £1,750,000 (limited to the profits of the period) of CY trading loss to CY-2 and £250,000 (limited to unused amount of the £2,000,000 losses available for carry back) of loss to CY-3. These claims exceed the de minimis of £200,000 and must therefore be made in a return.

The remaining £200,000 of CY trade loss will be carried forward under current rules for relief under s45A and s45B CTA 2010.

Example 2

Company B has current year (CY) trading losses of £2,125,000 and in the subsequent year (CY+1) has trading losses of £5,550,000. Its profits of the preceding years are as follows:

CY-1 — £1,100,000
CY-2 — £3,225,000
CY-3 — £1,175,000

The CY losses may be carried back to CY-1 to set against the £1,100,000 profits in full as current rules permit. The remaining £1,025,000 can be set against the profits of CY-2 under the new rules, leaving remaining profits of £2,200,000.

The CY+1 losses cannot be carried back to CY as there are no profits in that year but the new rules now allow them to be carried back further against CY-1 and CY-2. The CY-1 profits have been relieved in full by the CY losses so the only remaining period that may be relieved by losses of CY+1 is CY-2. £1,025,000 of the profits of CY-2 have been relieved by losses of CY leaving £2,200,000 available for relief. A maximum of £2,000,000 may be relieved under the new rules. The remaining £3,550,000 unrelieved losses of CY+1 will be carried forward for relief under s45A and s45B CTA 2010.

Group Cap

A group level cap of £2,000,000 applies for each relevant period (for example 1 April 2020 to 31 March 2021 and 1 April 2021 to 31 March 2022). A group for these purposes takes the definition in section 269ZZB CTA 2010 used in identifying a group for allocation of the group deductions allowance for loss restriction. The members of the group are those in the group at 31 March 2021 and at 31 March 2022.

Where the group cap applies, a nominated company is required to submit an allocation statement to HMRC showing which companies have been allocated amounts of the £2,000,000 cap. Further detail about the process for this can be found in Chapter 3 of this policy paper.

The submission of the allocation statement is required where any company in the group makes a claim that exceeds the de minimis limit (for example £200,000). The group reporting requirements will not be triggered if all companies in the group make de minimis claims. The group cap will also not apply if all group companies are only able to make de minimis claims, even if the claims exceed £2,000,000 in total.

Example 3

Five companies (A, B, C, D and E) make up a group for the purposes of section 269ZZB CTA 2010. In the accounting period ending 31 March 2021, the companies have trading losses remaining after carry back to the previous accounting period as follows:

Company A — £150,000
Company B — £150,000
Company C — £200,000
Company D — £200,000
Company E — £1,500,000

Companies A, B, C and D have losses below the de minimis threshold, so are able to make claims in advance of submitting their return for the accounting period.

Company E has up to £1,500,000 of losses to relieve. Since this amount exceeds the de minimis, Company E has to submit its claim in its return alongside an allocation statement (if it is the nominated company) showing all claims made within the group. The other claims total £700,000, so the group cap applies to restrict the amount Company E can relieve to £1,300,000.

De minimis limit

A de minimis of £200,000 operates to enable smaller claims to be made freely by groups and stand-alone companies. As previously noted, group companies are not subject to the group cap and separate reporting requirements if each of their claims do not exceed the de minimis amount. If a company has more than one accounting period ending within a relevant period, the total claims may not exceed the de minimis.

A de minimis claim may be made if the total amount of relief given by the claim does not (or could not) exceed £200,000. In calculating this, the company must take into account any available amounts that could be claimed as capital allowances of the period (or any other claim or relief that would result in an increase in the amount of the loss) and amounts remaining after carry back to the previous accounting period but before any surrenders of group relief.

Example 4

Company X has losses of £500,000 for its accounting period ended 31 December 2020.

Its profits of the previous period are £225,000.

For its 2020 accounting period, it has available capital allowance writing down allowances of £50,000 and a fellow group company with profits of £125,000 to which it could surrender losses as group relief.

The profits of the prior accounting period must be relieved leaving losses of £275,000. The losses could be increased by claiming the capital allowances for the period which would bring the losses available for relief to £325,000.

A surrender of losses to the fellow group company would reduce the available losses to £200,000 (within the de minimis) but as group relief notices of surrender may subsequently be withdrawn, that is not taken into account in determining the available amount.

Company X will not be entitled to make a de minimis claim and must claim any extended loss carry back in its company tax return.

Example 5

Company Z has losses of £400,000 for its accounting period ending on 31 March 2021.

It has a further £40,000 available in Capital Allowance writing down allowances which, if claimed, would bring the total losses to £440,000.

Their profits in previous periods are:

  • CY-1 — £150,000
  • CY-2 — £100,000
  • CY-3 — £75,000

£440,000 - the profit of CY-1 = losses of £290,000. Although Company Z has available losses that exceed the de minimis limit, it only has capacity to use £175,000 and able to make a de minimis claim.

Commencement and duration

The change applies to losses arising in accounting periods ending between 1 April 2020 and 31 March 2022.

Chapter 2 — Unincorporated businesses

Current Rules

Under the existing rules in section 64 of the Income Tax Act 2007 (ITA07) when a person carrying on a trade makes a loss for a tax year they may claim for that loss to be set off against their general income for the loss making-year, the previous year, or both years (“trade loss relief against general income”).

If a claim to trade loss relief against general income has been made, or if a claim has not been made because there is no general income against which a loss could be set, a person may also claim to treat any unrelieved loss as a capital gains loss of the tax year in which relief is claimed against general income (“capital gains relief”, section 71 of ITA07 and section 261B of the Taxation of Chargeable Gains Act 1992).

If a loss is made in one of the first four tax years in which the trade is carried on, a person may claim for the loss to be set against their other income of the three tax years before the one in which the loss was made (“early trade losses relief”, section 72 of ITA07).

If a person ceases to carry on a trade in a tax year and makes a loss in that year (or any part of the previous year falling within 12 months of the cessation of trade), they may claim for the loss to be set against profits of the same trade for the final year and then each of the three previous years (“terminal trade loss relief”, section 89 of ITA07).

Any losses which are not relieved under these provisions are available to be claimed and carried forward to be set against profits of the same trade in future years (“carry-forward trade loss relief”, section 83 of ITA07).

The losses of a tax year for a trade are those for the basis period for that tax year for that trade. In a continuing business, the general rule is that a basis period for a tax year is the 12 month period ending in the tax year for which accounts are drawn up. The rules for identifying basis periods are in Chapter 15 of Part 2 of the Income Tax (Trading and Other Income) Act 2005.

There are a number of restrictions which affect claims to loss reliefs: for details see Chapters 2 and 3 of Part 4 of ITA07. Some of these restrictions apply only to trade (not professions or vocations).

New Rules

Summary

The current rules allow a trade loss for a tax year to be set against general income of the loss-making year and/or the previous year. There is a limit on the amount of certain income tax reliefs, including trade loss relief against general income, that can be used to reduce total taxable income — this is the higher of £50,000 or 25% of adjusted total income. There is no change to these rules.

The limit above does not apply to losses used against profits of the same trade. Therefore, losses set against profits of the same trade of the previous year, as part of a claim for trade loss relief against general income, are not subject to a limit.

For trade losses of tax years 2020 to 2021 and 2021 to 2022, additional relief is provided by allowing unrelieved losses to be carried back and set against profits of the same trade for three years before the tax year of the loss.

The amount of loss for tax year 2020 to 2021 that an individual can carry back to the earliest 2 years of the extended period (2017 to 2018 and 2018 2019) is capped at £2,000,000 in total. Likewise, the amount of loss for tax year 2021 to 2022 that an individual can carry back to the earliest 2 years of the extended period (2018 to 2019 and 2019 to 2020) is capped at £2,000,000 in total.

Unlike with companies in groups, there is no partnership level cap.

Detail

The extension builds on the existing trade loss relief against general income in section 64 of ITA07. It applies where a claim has been made under section 64 of ITA07 to set a trade loss for 2020 to 2021 or 2021 to 2022 against general income of the current year, the previous year, or both, and relief for the loss cannot be fully given under that claim.

All other current loss reliefs remain available. For example, if a claim under the new relief is not possible because there are no trading profits in earlier years against which to set a loss, any unrelieved loss remains available to be claimed to carry forward and set against trading profits in future tax years.

The existing restrictions that apply to loss relief claims in Part 4 of Chapter 2 of ITA07 also apply to losses for the purposes of the extended relief.

The extended relief applies to professions and vocations in the same way as for trades.

For the purposes of computing the amount of profits in respect of which Class 4 National Insurance Contributions are payable, relief shall be available under, and in the manner provided by, the new relief.

Provisions for 2020 to 2021

Where a section 64 claim has been made for set-off of a trade loss for 2020 to 2021 against general income of 2020 to 2021 only, a claim may also be made under the new provision to carry back unrelieved losses against profits from the same trade for 2019 to 2020, 2018 to 2019 and 2017 to 2018.

Where a section 64 claim has been made for set-off of a trade loss for 2020 to 2021 against general income of the previous year 2019 to 2020 only, or for both 2020 to 2021 and 2019 to 2020, a claim may also be made under the new provision to carry back unrelieved losses against profits from the same trade in 2018 to 2019 and 2017 to 2018.

If relief for a loss for 2020 to 2021 would be available under section 64 but a claim has not been made because the trader has no income to claim against for either 2020 to 2021 or 2019to 2020, a claim may still be made under the new provision to carry back unrelieved losses against profits from the same trade in 2018 to 2019 and 2017 to 2018.

Losses carried back against profits of the trade in 2019 to 2020, 2018 to 2019 and 2017 to 2018 (or only 2018 to 2019 and 2017 to 2018) will be set-off against the profits of the most recent year before earlier years.

Carry back of losses from 2020 to 2021 to the previous year 2019 to 2020 is uncapped against profits of the trade whether under the new rules or as part of a claim under section 64.

Losses for 2020 to 2021 carried back to set against profits of the trade in 2018 to 2019 and 2017 to 2018 are subject to a £2,000,000 cap.

Provisions for 2021 to 2022

Where a section 64 claim has been made for set-off of a trade loss for 2021 to 2022 against general income of 2021 to 2022 only, a claim may also be made under the new provision to carry back unrelieved losses against profits from the same trade for 2020 to 2021, 2019 to 2018 and 2018 to 2019.

Where a section 64 claim has been made for set-off of a trade loss for 2021 to 2022 against general income of the previous year 2020 to 2021 only, or for both 2021 to 2022 and 2020 to 2021, a claim may also be made under the new provision to carry back unrelieved losses against profits from the same trade in 2019 to 2020 and 2018 to 2019.

If relief for a loss for 2021 to 2022 would be available under section 64 but a claim has not been made because the trader has no income to claim against for either 2021 to 2022 or 2020 to 2021, a claim may still be made under the new provision to carry back unrelieved losses against profits from the same trade in 2019 to 2020 and 2018 to 2019.

Losses carried back against profits of the trade in 2020 to 2021, 2019 to 2020 and 2018 to 2019 (or only 2019 to 2020 and 2018 to 2019) will be set-off against the profits of the most recent year before earlier years.

Carry back of losses from 2021 to 2022 to the previous year 2020 to 2021 is uncapped against profits of the trade, whether under the new rules or as part of a claim under section 64.

Losses for 2021 to 2022 carried back to set against profits of the trade in 2019 to 2020 and 2018 to 2019 are subject to a £2,000,000 cap.

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 makes a claim under 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 makes a claim under 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.

Commencement and duration

The change is temporary and only applies to trade losses for tax year 2020 to 2021 and 2021 to 2022. Trade losses in 2022 to 2023 will be subject to the normal one year carry back rule.

Chapter 3 — Claims

Companies

A claim for a loss can be made once the extent of the loss has been ‘established’. The claim must be for an amount which is quantified at the time when the claim is made - this is usually done with the making of a return. Claims to the extended loss relief must be made within 2 years of the end of the accounting period in which the loss being carried back arises.

A stand-alone, de minimis, claim to carry-back trade losses may also be made under Sch1A Taxes Management Act 1970 as soon as the accounting period in which the loss occurs has ended providing it can be quantified appropriately. Such claims will require sufficient information and evidence, such as draft accounts or management accounts, to enable their validity and accuracy to be verified.

Any claim that exceeds the de minimis limit of £200,000 must be made in a company tax return.

Amended company tax returns

You do not need to submit an amended company tax return for claims for the accounting periods covered by the extended relief. If you submit amended returns on the online portal for the accounting periods for the extended relief claim, they will be rejected as the time limit on amendments will have passed. A claim made in the company tax return for the accounting period of the loss will be treated as an amendment to those earlier returns.

If you make a claim in a company tax return, make sure box 45 on CT600 form is completed. More details on the claims should be explained in the computations in the same way that any claim for one year carry back is made.

Making a de minimis claim

If you want to make a de minimis claim outside the company tax return, you can send a claim submission to HMRC.

You will need to give the relevant information, such as:

  • UTR
  • company name
  • agent code (if applicable)
  • start and end dates of loss making accounting period
  • amount of loss
  • dates of accounting periods to carry the loss back to and the relevant amounts
  • management accounts as a PDF if a tax return has not been completed for the loss-making accounting period

Group claims

Non-de minimis claims must be made in a return and, if made by companies that are members of a group, are only valid if they are accompanied by a loss carry-back allocation statement. The loss carry-back allocation statement is submitted on behalf of the 2020 group and 2021 group by a nominated company.

A 2020 group is defined as two or more companies that were members of the group (within the meaning given by section 269ZZB CTA 2010) at 31 March 2021. A 2021 group is defined as two or more companies that are members of the group at 31 March 2022.

A company may be selected as the nominated company by the ultimate parent of the 2020 or 2021 group, all of the members of the 2020 or 2021 group or two or more members of the 2020 or 2021 group together with the consent of the ultimate parent. There is no need to submit the nomination to HMRC. However, groups should have a nomination in place which fulfils the legislative requirements and should be able to supply this if it is requested.

Loss carry-back allocation statement requirements

A 2020 loss carry-back allocation statement must be submitted by 31 March 2023 and a 2021 loss carry-back allocation statement must be submitted by 31 March 2024 and must:

  • be in writing
  • be signed by the appropriate person in relation to the nominated company
  • identify the ultimate parent of the group
  • list all the members of the 2020 or 2021 group as appropriate
  • list all the de minimis claims made by members of the group to include the name of each claimant company and claim amounts
  • state the total amount of relief given by the de minimis claims
  • list the non-de minimis claims made by members of the group to include the name of each claimant company and claim amounts

The total amount of relief given by the de minimis and non-de minimis claims must not exceed the group cap of £2 million.

Where any changes or amendments to the non-de minimis claims are required, the nominated company must notify HMRC of the changes in writing.

In the event of any company in the group making a de minimis claim after the loss carry back allocation statement has been submitted, the nominated company must amend the statement within 30 days of the date the de minimis claim is made. The amendment should include the name of the company or companies that have made a subsequent de minimis claim or claims as well as the claim amount(s).

If the making of the subsequent de minimis claims results in the £2 million group cap being exceeded, the nominated company must amend the non-de minimis claim(s) as appropriate. If the nominated company fails to amend the loss carry back allocation statement, an officer of HMRC may amend the non-de minimis claim(s) as they see fit by written notice to the nominated company, the ultimate parent of the group or both.

The full legislative requirements are set out in the statutory instrument.

Unincorporated businesses

A claim to loss relief will normally be made in a person’s tax return, but where a claim will affect more than one year a stand-alone claim may be made outside of a return. The claim must specify the name of the business, the period for which the loss is made, the amount of the loss, and how the loss is to be used.

A stand-alone claim may be made as soon as the basis period for which the loss is made has ended and the loss has been calculated.

The time limit for making a claim to the extended relief for a trade loss in tax year 2020 to 2021 will be 31 January 2023.

The time limit for making a claim to the extended relief for a trade loss in tax year 2021 to 2022 will be 31 January 2024.

Repayments

Where the period to which losses are carried back is under enquiry, repayment may be delayed until that enquiry has been concluded.

Interest

Rules relating to both interest on overdue tax and repayments of overpaid tax, relating to the proposed extension, are identical to those applying to loss relief under section 37 CTA 2010 and section 64 of ITA07.

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