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The UK tax authority provides financial relief for every corporate and unincorporated business, whether the company owner resides in the UK or abroad (operating an agency or branch inside the country), by allowing them to claim loss reliefs against their profits which would then significantly reduce their bills on corporation or income tax.
In light of the financial blows brought by the COVID-19 pandemic, the former Chancellor Rishi Sunak announced in the Spring 2021 Budget that the length of the carry-back period on which businesses can claim tax reliefs on their trading loss (between 2020 2022 tax years) would be temporarily extended to three years.
This article will explain all about relief from corporation tax on losses that businesses incur, including the extent of trading losses, eligibility for trading loss relief, computation, and claim options.
What are Trading Losses?
Trading losses happen when the income is less than the allowable expenses. These losses that businesses incur from their trading profits, property business income, or sales of capital assets within an accounting period can be claimed tax reliefs through corporation tax return, resulting in reduced corporation or income tax.
Take note that trading losses can only be offset against allowable expenses, which will be discussed further below. Company losses that exceed £2 million for the accounting period or periods that end between 1 April 2020 and 31 March, 2022 (tax years 2020/21 and 2021/22) can now claim reliefs from their losses that exceed £2 million through the temporary three-year extension of relief, as opposed to the previous limit of 12 months. The next tax year 2022/23 and onwards will return to the original one-year carry back rule.
Generally, any unused amount of the loss on trading income is submitted through corporation tax return. Businesses below a de minimis (small value) limit of £200,000 or are attempting to claim reliefs for more than a year can be made outside self employed tax returns, which means they don’t have to wait for the submission date of company tax returns and simply send HMRC their claim submission.
Businesses claiming extended loss in revenue relief, that is, for more than a year, must submit their claims to HMRC within two years of the conclusion of the accounting period in which the loss occurred. They have several options for claiming relief against their corporation or income tax bills, which are to set loss against overall profits in the following:
- present accounting period
- last 12 months
- later period
Who is Eligible to Claim Corporation Tax on Losses Relief?
Businesses of all sizes, owned by groups or individuals inside or outside the UK, can claim relief against their total profits of the same accounting period or of the previous 12 month period or more. Those on extended relief or groups will be capped at a certain time limit.
Even companies that have stopped their operations can still claim trading loss reliefs through terminal loss relief, discussed more below. HMRC will first assess all evidence submitted by the claiming companies, which includes information from their accounting records or management accounts.
Check out our other article Does A Sole Trader Pay Corporation Tax to see if sole traders are eligible for this relief.
How to Compute Trading Loss
Only allowable business expenses can be offset against the trading profit to reduce corporation tax liability, which are as follows:
- Finance costs
- Marketing expenditures
- Stock and raw materials
- Staff and subcontractor expenses
- Printing, postage, & stationery (PPS)
- Property business-related travel and subsistence costs
- Overheads (e.g., rates, rent, heat, light, etc.)
- Capital investment deduction allowance (e.g., machinery, equipment, computer equipment, motor vehicles, etc.)
Losses incurred between 1 April 2020 and 31 March, 2022 can be carried back for three years. The first previous year is uncapped, whilst the other two previous years are capped at £2 million each. The count starts from the most recent year and then to earlier years—for instance, 1 April 2020 and 31 March 2021 (2020/21) loss carried back to 2019/20 before 2018/2019, then 2017/2018.
A £2 million cap of trading losses is set in the accounting period between 1 April 2020 and 31 March 2021. Another separate cap of the same value is set in the period between 1 April 2021 to 31 March, 2022. Any group company is automatically capped at £2 million as well for each period.
Trading losses are computed similarly to trading profits—chargeable gains are not calculated in either. Capital deduction allowance is added in the computation of the loss, which would then be reduced by any balancing charges.
To calculate trading loss, property business adds the capital deduction allowance (which will increase the loss), any balancing charges (which will deduct the loss), and charitable donations and annuities (also called trade charges). They don’t include any gains or trading losses made on selling their assets on the computation.
They then have various options on how to claim their corporation tax relief—charge it on the current year, carry the loss back to earlier years, or carry it to future periods for a year or more.
Take, for example, a new company making a £5,000 loss in its first tax year and spending £3,000 on deduction allowance expenses before starting the business. In the next accounting period, it earned a £10,000 profit. This company can claim £8,000 worth of relief against its profit in the second year, which means a £1,500 reduction in corporation tax bills for that tax year.
How to Claim a Trading Loss?
Since the corporation tax is set to increase to 25 per cent from 19 per cent this April 2023, businesses may want to claim their relief or deduction allowance now or carry their loss forward to gain a 25 per cent relief. A form for claiming trading losses will be found in the company tax return.
Here are various options businesses can claim their loss relief:
• Current Year Relief
Claiming current-year relief works best for businesses that have non-trading income alongside, such that they still receive a salary from their previous employment or income from selling certain assets.
Through this option, let’s say a business’ total profits (which include non-trading income) amount to £30,500. The business’ deduction allowance, on the other hand, total £15,000. Its corporation tax due will then be decreased to £15,500.
• Carry-Back Relief
For companies trading within the accounting period or under the earlier 12-month period, another way is to make the loss set against profits from the previous 12-month period, not necessarily the accounting year. The losses they incur for the accounting periods that fall between 1 April 2020 and 31 March, 2022 can be carried back through the temporary three-year extension for relief.
Take, for instance, a company making profits of £20,000 in the previous 12 months and a loss of £8,000 in the accounting period 1 January 2016 to 31 December 2016. The gains it reports will be £12,000, considering the loss. The £8,000 loss can be set against the profits for the last accounting year.
• Carry-Forward Relief
Certain circumstances make carried forward relief the best option for companies, such as they have major customers placing orders that should be already paid only in the next accounting period.
Moreover, if their profits are between £50,000 and £250,000, the increase in the corporation tax liability to 25 per cent in April 2023 will make them liable for a higher tax bill. It’s best their losses be carried forward so that they gain 25 per cent relief instead.
• Group Relief
Companies that have a qualifying group relationship with another company may opt out for carried back or carried forward reliefs as they can simply offset their trading losses against another group member’s profits.
The government doesn’t consider group companies as one for tax purposes nevertheless, even though it allows transfer of trading losses between companies. The company making the loss transfers is referred to as the surrendering company whilst the claiming company is called the claimant company. This also applies to their tax on investment income.
• Terminal Loss
Companies that incurred losses from trading in the last 12 months, also called terminal loss, and thus have to direly cease the trade can claim terminal loss relief by carrying their trading losses back against their total profits of the last three years.
• Anti-Avoidance Rules
Alongside the three-year loss carry-back extension, anti-avoidance rules are also established. This is to prevent group companies from claiming deduction allowance or relief when their purpose is to disconnect from a group from 1 April 2020 to 31 March 2021 (or 1 April 2021 to 31 March 2022 for 2021 claims). HMRC will not grant their 2020 or 2021 claim as a result.
How Can Legend Financial Help?
The temporary three-year extension for claiming loss reliefs is a significant help to companies who have to deal with corporation tax on losses despite financial challenges. Legend Financial is here to help. Our group of accountants and tax experts serve clients in these kinds of situations on a daily basis. We help them choose which best option to claim relief or deduction allowance as well as qualify for it. Reach us today!
References
Corporation Tax (CT). (n.d.). Retrieved from Revenue: https://www.revenue.ie/en/companies-and-charities/corporation-tax-for-companies/corporation-tax/trading-losses.aspx
Work out and claim relief from Corporation Tax trading losses. (13 August 2013). Retrieved from Gov.UK: https://www.gov.uk/guidance/corporation-tax-calculating-and-claiming-a-loss
Can you claim for Corporation Tax relief if you make a loss from trading? (n.d.). Retrieved from The Gazette: https://www.thegazette.co.uk/all-notices/content/103953
HMRC refund for trading losses: A cash boost if you’ve made a loss. (10 September 2021). Retrieved from Rouse Partners: https://www.rousepartners.co.uk/hmrc-refund-for-trading-losses/
