Budget 2021 – greater flexibility to offset losses

A welcome extension to the loss relief provisions was announced today by the Chancellor in his budget speech.

In summary, the extension will provide a three year carry back of trading losses crystallised in certain period for all businesses. Losses carried back under these provisions will be set against profits of the later years first.

As you may expect, there are certain restrictions (specifically, a £2 million limit) which will apply to limit the benefit of this extension and there are some differences between how the provisions will apply for corporation tax and income tax purposes. These are considered below.

On the whole though, the extension will be welcomed by many businesses who have suffered significant losses during the pandemic – the cash flow benefit of a repayment of tax previously paid is much more useful than the promise of lower tax bills in the future by carrying losses forward.

Details are still a bit sketchy, and we will await the Finance Bill to fully understand how this will be applied.

Corporation tax

Under normal circumstances, if a company generates a trading loss in an accounting period, it can be set against any other non-trading profits it generates in that period with any excess then being carried back against total profits of the previous 12 months.

The extension only applies to losses crystallised in accounting periods ending in the period from 1 April 2020 to 31 March 2022.  It is not clear at this stage how this will apply where there are short periods of account, and whether any anti avoidance provisions will be brought in to prevent companies changing their accounting period to maximise or manipulate their relief.

The £2 million cap only applies to the offset of the losses in the earlier two periods (i.e. it does not impact upon the ‘normal’ carry back rules) and is applied to each 12 month period to which this extension applies (i.e. 1 April 2020 to 31 March 2021 and separately to 1 April 2021 to 31 March 2022).

Furthermore, the £2 million cap is group wide so will require some allocation across group members.

Income tax

Ordinarily, if a self-employed person realises a loss in an accounting period, they may claim to set this loss off against their net income of the current year, the previous year or both years (subject to the limit on income tax reliefs).

The extension applies to losses crystallised in the 2020/21 and the 2021/22 tax year, with each year having its own £2 million cap.

Unlike the application to companies, the £2 million cap is specific to individuals – there is no partnership level limit.

If you would like to discuss this in further detail, please get in touch with your usual contact or e-mail us at experts@tacs.co.uk.

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