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May 25th 2021

How to get a tax refund quickly using the new enhanced loss relief rules

Legislation is being introduced in the Finance Bill 2021 to provide a temporary extension to loss carry back relief for companies and unincorporated businesses. This article focuses on the position for companies.

Existing rules

Under existing rules, a company which incurs a trading loss can generally:

  • set off the loss against other income and gains of the same accounting period;
  • set off the unused balance of the loss against total profits arising in the preceding 12 month period, provided that the same trade was carried on the earlier period;
  • carry forward the loss for relief against total profits arising in future accounting periods (assuming the loss in question arose after 1 April 2017).

Companies that cease to trade can also claim “terminal loss relief”, which allows unlimited carry-back of trading losses arising in the final accounting period against total profits of the previous three years.

Extended loss carry back

As noted above, under current rules trading losses can generally be carried back one year without restriction.

The new rules will enable trading losses arising in accounting periods ending between 1 April 2020 and 31 March 2022 to be carried back up to three years, with losses required to be set against the profits of the most recent years first, before carry back to earlier years.

Companies will still be able to carry back losses against total profits arising in the preceding 12 month period without restriction, but the amount of loss that can be carried back to the earlier two years is to be capped for each of those years at £2,000,000. There is a cap of £2m for losses arising in accounting periods ending between 1 April 2020 and 31 March 2021; and a separate cap of £2m for losses arising in accounting periods ending between 1 April 2021 and 31 March 2022. Groups will be subject to a group cap of £2m for each period.

Extended carry back claims will normally need to be made in the company’s corporation tax return however claims below a de-minimis limit of £200,000 may be made outside a return. In other words, a company (whether a single company or member of a group) with losses capable of providing relief up to £200,000 may claim in respect of a relevant accounting period, without having to wait to submit a corporation tax return.

Groups are subject to a group cap of £2m where any company is able to make a claim in excess of the £200,000 de minimis limit. Any de minimis claims for the period are taken into account when determining the total amount available for any claims in excess of the de minimis limit.

Standalone claims

A claim for a loss can be made once the extent of the loss has been “established”, and must be made within two years of the end of the accounting period in which the loss arose.

A standalone, de minimis claim can be made under Sch 1A Taxes Management Act 1970 as soon as the accounting period in which the loss occurs has ended, provided it can be quantified appropriately. HMRC will expect to be able to verify such a claim by reference to “sufficient information and evidence”, for example robust management accounts.

Companies wishing to make a standalone claim should write to their normal HMRC corporation tax contact address setting out:

  • company name and UTR
  • details of the accounting period in which the loss arose
  • evidence of the loss incurred (management accounts would be acceptable)
  • details of the amount of the loss to be carried back
  • company bank details for repayment purposes

Alternatively, ask your accountant to write on your behalf.

Claims should not be made until the Finance Bill receives Royal Assent.

Claims exceeding the £200,000 de minimis limit must be made in the company’s corporation tax return.

The Finance Bill is expected to receive Royal Assent in July 2021.

Contact us for assistance with any of the matters discussed in this article, or visit our Edinburgh or Kirkwall office.

Scholes Chartered Accountants helps companies to maximise tax savings, including those arising from loss relief claims.

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