The rules explained, plus worked examples
The existing carry-back rule – relief for trading losses can be found in section 37 Corporation Tax Act (CTA) 2010. A company incurring a trading loss in an accounting period can make a claim to offset the loss against total profits of the previous 12 months after first having set the losses against any profits of the accounting period in which the loss occurred.
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 £5m, 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.
For companies that cease to trade and are making a terminal loss in the trade section 39 CTA10 allows unlimited carry back of trading losses of the final accounting period to set off against profits of the previous three years (provided that the company was carrying on the trade in the accounting period or period(s) which fall in that three year period).
Where an accounting period straddles the three year period, the profit is apportioned and loss can only be set off against profit falling within the three year period.
Changes for tax losses arising in accounting periods ending between 1 April 2020 and 31 March 2022
For accounting periods ending between 1 April 2020 and 31 March 2022, up to £2m of company tax losses can be carried back up to three years, with losses required to be set against profits of most recent years first before carry back to 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. Groups are subject to a group cap of £2m for each relevant period.
There is no change to the current one-year unlimited carry back of trade losses, or to the terminal loss relief: those will remain unchanged. Also, the carry forward option will still be 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.
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.
HMRC has now provided access to a new online form to be used by companies to make de minimis claims under the new temporary extended loss carry back rules. Any stand-alone company or group company wishing to make a claim exceeding £200,000 must make the claim in their company tax return.
Example 1
Company A has a trading loss incurred in the year 31 March 2021 of £6,000,000 and profits of previous periods as follows:
Current rules which allow £2,500,000 of 2021 trading loss to be carried back to 2020 remain unaffected and therefore uncapped.
The legislative changes allow Company A to carry back £750,000 (limited to the profits of the period) of 2021 trading loss to 2019 and £1,250,000 (limited to unused amount of the £2m losses available for carry back) of loss to 2018.
These claims exceed the de minimis of £200,000 and must therefore be made in a return.
The remaining £1,500,000 of 2021 trade loss will be carried forward under current rules for relief under s45A and s45B CTA 2010.
Example 2
Company B has a trading loss incurred in the year 31 March 2021 of £5,000,000. Its profits/losses of the preceding years are as follows:
Under the current rule the loss in 2020 of £2,100,000 can be offset in full against the profit in 2019.
The legislative changes allow Company B to carry back £1,125,000 (limited to the unrelieved profits of the period) of 2021 trading loss to 2019 and £875,000 (limited to unused amount of the £2m losses available for carry back) of loss to 2018.
The remaining £3m unrelieved losses of 2021 will be carried forward for relief under s45A and s45B CTA 2010.
De minimis limit
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 3
Company C has a trading loss incurred in the year 31 March 2021 of £550,000. Its profits of the previous periods are:
Losses that can be assessed for the de minimis claim are 2021 losses (ie £550,000) less the amount that is offset against 2020 (under the old rule) ie £300,000 and the result is £250,000. Although Company C has available losses that exceed the de minimis limit, it only has capacity to use £190,000 and able to make a de minimis claim.