June 28, 2021

Adam Rawling

Carrying back losses to receive a tax refund from HMRC

As a Limited Company or a Sole Trader you hope to be profit making, however, COVID 19 may have changed your profit making business in to a loss making one.

Sole Trader
Scenario
COVID hits the UK and lockdown begins in March 2020, your income slows down but with the uncertainty and the need, you decide to keep the business ticking over.  This ends up with a trading loss as a sole trader for the 2020/21 tax year (6 April 2020 to 5 April 2021) of £75,000.

So what can I do with these losses?
Well, prior to COVID, you could offset these losses against any other income in the year, carry them forward to offset against future profits or carry them back one year against prior year against general income.

Now, for the 2020/21 and the 2021/22 tax years, as well as the above, you are able to carry these losses back against the prior three tax years and for sole traders this is against income of the same trade. However as above, for the first prior tax year the loss can be offset against general income and not only that of the same trade.

To carry on the scenario, you had the following income and tax for the prior three tax years.

2019/20
• Income from Self Employment of – £25,000
• Employment Income of – £5,000

2018/19
• Income from Self Employment of – £35,000
• Employment Income of – £8,000

2017/18
• Income from Self Employment of – £32,000
• Employment Income of – £6,000

Therefore, the losses generated in the 2020/21 tax of £75,000, will eliminate all income in 2019/20 of £30,000, all income from self employment in 2018/19 of £35,000 and part of the self employment income of £10,000 in 2017/18.

This will result in a physical refund of tax, via a cheque or bank transfer from HMRC.

Limited Companies
The rules are similar for Limited Companies, the losses can be carried back in the prior three accounting years, the carry back must target the most recent years first.

The loss can be carried back with no limits to the first prior year, as has always been the case.  In the two further years this is capped at £2,000,000 per year.

Claims must be made within two years of the end of the accounting period in which the loss being carried back arises.

All claims must be made in a corporation tax return however if the claim is £200,000 or lower, it can be submitted before the tax return is due.

Scenario
Trial Creative Media Ltd makes a loss in the year to 31 December 2020 but has previously been profitable. Normally the loss could only be carried back to offset against profits made during the year ended 31 December 2019.

Under the new rules, once 2019 profits have been fully offset, up to £2m of such losses can be carried back against profits arising in the years ended 31 December 2018 and if any remains, against 2017.
The extended tax relief available must always be offset against profits from the most recent years first. For example, a loss from 2020 is to be carried back to 2019 before 2018, and then to 2018 before 2017, similar to sole traders.

Why has this changed for two tax years only?
This is purely a short term measure to support the UK economy to recover from the impact of the pandemic.

The extra cash generated through the tax refund will help the small profit-making businesses (before the pandemic) that are struggling to open up their businesses.

Summary for both Sole Traders & Limited Companies


What should I do?
If you are a sole trader or a director of a Limited Company and are wondering which option to take (i.e carry forward or carry back), it is all down to your needs.

If you need the immediate cashflow boost then the solution is simple, you carry it back, offset the losses against prior years/periods and receive the tax refund which will provide a cash injection in to the business.

However, if you are wondering whether it is more beneficial to carry forward against future profits then you need to consider future tax changes, especially as Corporation Tax is increasing to 25% in April 2023 for companies with profit over £50,000.

If you want to chat through any of this, please reach out, we are always happy to help.

DIGI
Email: hello@digiaccountancy.co.uk
Call: 0161 250 7500
WhatsApp: 07491035984

All information is correct as at 24 June 2021.

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