Temporary extension to loss relief rules – a quick summary for companies

In the March Budget it was announced that there would be a temporary widening of the loss relief rules. This is to help businesses hardest hit during the pandemic so that they can carry back losses and claim any tax paid on profits in the previous 3 years.

The current rules are that companies can use losses firstly against any other profits or gains in the current year and then carry back any remaining losses against profits from the same trade for the previous 12 months. There are also some additional special rules for businesses in the final 12 months of trading, which I won’t go into in this article.

The new tax relief will be available to companies who have an accounting period ending between April 2020 and April 2022. There is a cap of £2m on the amount of tax relief a company can claim during the extension period and if the loss is less than £200k then you can submit a claim outside of the corporation tax regime and obtain a tax refund sooner.

Example:

ABC Limited made a loss of £200k for the accounting period ended 31 March 2021. In the year to 31 March 2020 the company had trading profits of £100k. In the year to 31 March 2019 the company had trading profits of £75k and in the year to 31 March 2018 the company had trading profits of £50k.

Under the previous rules ABC Limited could have carried back £100k of the loss to reclaim the tax paid in the previous year in full. ABC Limited would then have losses to carry forward and offset against future profits from the same trade of £100k.

With the new temporary extension ABC Limited could carry back £100k of losses to 31 March 2020, £75k of losses to 31 March 2019 and reclaim the tax paid in both these years in full. The remaining £25k of losses could be offset against the £50k profit made in the year to 31 March 2018, meaning half of the tax paid for the year to 31 March 2018 could be claimed back.

A key point to remember is that sometimes companies can make an accounting profit for an accounting period (as shown on your annual accounts) but make a loss for tax purposes, due to the tax relief claimed on capital expenditure.

Please get in touch with your usual Albert Goodman contact if you would like more detail on the above and we will be keeping a close eye as always on maximising tax reliefs for our clients.