Sometimes businesses make losses, and can do so for a whole range of reasons. COVID-19 has been another major cause, with many businesses struggling to make a profit.

To combat it, the government have extended the terms of the existing carry back scheme, to help businesses deal with trading losses.

What are trading losses?

Trading losses happen when business expenses and costs are higher than the income. Our blog Understanding Accountancy Terms: Profit and Loss explains this in more detail.

What does it mean to ‘carry back’ a trading loss?

Businesses can 'carry back' any losses from one year, and put them against profits in the previous year. This lowers the amount of profit they made in the previous year, which means a lower tax bill.

Because it's in a previous year, the business has already paid its tax bill, so it can then claim a reimbursement of the tax it paid - Corporation Tax or Income Tax.

The loss carry back period is usually 12 months, which means that the trading loss can be carried back and offset against the previous 12 months.

A limited company offsets the losses against any profits in the same accounting period, and can then claim to offset the remaining loss against its total profits from the previous 12 months.

To carry back losses against income tax, a person can offset their trading losses against their net income from the current year, the previous year, or both.

An example of carry back losses

This is how it normally works. Imagine your limited company made:

  • A loss of £7,000 in the accounting period 1st January 2018 to 31st December 2018, and;

  • A profit of £19,000 in the previous 12 months.

Using the carry back rules, the company’s £7,000 loss is offset against the previous accounting year's profits. This lowers the previous year's profit from £19,000 to £12,000.

Less profit means less tax, but you've already paid tax on the full amount of £19,000, so you'll now get a tax rebate for the difference.

So what is the extension to the carry back rules?

The loss carry back period has been temporarily extended from one year to three. This is temporary, and will last for the next two years.

It means that losses up to a maximum of £2 million can be carried back against the previous three years, starting with the later year first.

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Which accounting periods do the extended carry back rules apply to?

This depends on whether you're claiming to carry back losses for a limited company, or as a sole trader or partnership.

For limited companies: The three-year extension applies to trading losses occurring in accounting periods which end between 1 April 2020 and 31 March 2022.

For unincorporated businesses: The extension applies to trading losses occurring in the 2020-21 and 2021-22 tax years.

How do I claim under the carry back rules?

The claim is typically submitted as part of your tax return for the business. If you're making a standalone claim, you'll need to include:

  • The name of the business.

  • The amount of the loss.

  • The tax period during which the loss has taken place.

  • How the loss is to be utilised.

It is possible to make a claim, even after everything has been submitted. Any tax that you’ve already paid out during the carry back period will generate a refund. If owe corporation tax then this will be deducted from your bill.

Call 020 3355 4047 to talk to one of our team about your tax relief claim.

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