The new rules for trade loss relief explained

This will give rise to a further option for loss relief, allowing a claim to be made to offset a trade loss for 2020-21 against trade income for 2019/20, 2018/19 and 2017/18, subject to a cap of £2 million. 

With many businesses having suffered due to the impact of COVID-19, now is a great time to review the potential to maximise loss claims.

The new rules will allow companies with accounting periods ending between 1st April 2020 and 31st March 2022 to carry back trading losses to an extended period of the previous three years, offsetting against profits in the most recent year first. For sole traders, trade losses of tax years 2020/21 and 2021/22 can claim additional relief by carrying back unrelieved losses and setting these against profits of the same trade for three years before the tax year of the loss.

The proposed extension will build on the existing trade loss relief against general income. 

All other current loss reliefs will remain available. 

As the legislation has not been enacted, this means HMRC cannot give effect to loss claims and as such no repayments under the extended loss carry back can be made until the Finance Bill 2021 receives Royal Assent. This is due to take place before Parliament take summer recess in July.

Although we cannot yet process the claims, we can certainly look to see what options would be available to you and help you plan ahead.

Planning tips for self-employed individuals and partners 

There are lots of planning points to consider when utilising losses. At TaxAssist Accountants, we always look to set your loss against income suffering a higher marginal rate of tax to maximise your refund. This means we try to use your loss against income taxed at 45%, then income taxed at 40%, and finally income taxed at 20%.

If we are setting your loss against other income, such as dividend income, we would again look to save tax at the highest marginal rate we can. As well as maximising the income tax claim, we would also look to maximise the claim for Class 4 national insurance refund, where relevant.

We would also consider personal allowances. Where income is already covered by your personal allowance, there is little point in setting a loss against it as this will not save you tax. In certain circumstances we may be able to restore your personal allowance where it is lost due to having higher income in a previous year.

Finally, as they say, timing is everything. We never know what the future may hold but it could be increased taxes or increased profits so thinking ahead of where to utilise losses is key.

Planning tips for companies

Remember that corporation tax rates are to set rise from 19% to 25% in April 2023. The Government will introduce a new Small Profits Rate of 19% for companies with annual profits of £50,000 or less. Companies with profits between £50,000 and £250,000 will pay tax at the main rate of 25% reduced by a marginal relief providing a gradual increase in the effective Corporation Tax rate.

So, for companies who may have to pay the new 25% rate and who are able to use the extended loss carry back opportunity, they will need to consider the respective benefits of claiming a tax refund now at 19% or carrying forward losses into where they may attract relief at 25%.   

This will very much depend on your particular situation as you may prefer to claim a refund now and aid your current cashflow position rather than wait.

The date a company uses for its year end can also make a significant difference to the size of its next corporation tax bill, depending on whether profits are falling or rising. We can also help advise you on tax planning opportunities and let you know your options.

We can help

Whether you are a sole trader/partnership or limited company there are lots of tax saving opportunities when it comes to losses. The difficulty is understanding these rules and trying to work out what is best for you and your business. We can help you understand what options you have, what the tax benefits are and help you complete all the relevant documentation.

Call us today on 0131 665 0771 or use our online contact form to find out more about our services and how they can benefit your business.

Date published 12 May 2021 | Last updated 18 May 2021

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.