How does loss carry back work?
Ordinarily, losses that have been incurred by a trading company or unincorporated business can be carried back 12 months to the previous accounting period or tax year.
However, in the March 2021 Budget, the Chancellor announced that trading losses can be carried back for 3 years for losses incurred by companies in accounting periods ending between 1 April 2020 and 31 March 2022 (or for unincorporated businesses such as the self-employed, for tax years 2020/21 and 2021/22).
Eligibility
The carry back option is available to businesses of all sizes but there is a £2 million cap on losses carried back more than 1 year. Groups are subject to a group cap of £2,000,000.
You should note that the £2 million cap applies separately to the unused losses of each tax year within the duration of the extension, but the existing ability to carry back losses for one year remains unrestricted.
Claims that exceed £200,000 must be made in a company tax return/CT600, however claims under this threshold can be made outside of the company tax return by writing to HMRC. This means that they won’t need to wait until they submit their next tax return to make their claim.
If there are insufficient profits in earlier years to absorb loss relief claims under these rules, any unrelieved losses can be carried forward to set against trading profits in future tax years.
What are the benefits of using loss carry back?
By claiming a carry back loss you can reclaim tax from HMRC previously paid on profits from earlier years.
This will create a repayment of 19% against your losses and can therefore provide a vital cash boost for companies in need of support.
What do I need to claim?
HMRC will require evidence supporting the value of the loss and this can take the form of management accounts or information from your accounting records.
An example
ABC Ltd had been a previously successful business making £250,000 profit per annum, but in the current year suffered a £400,000 loss as a result of the COVID-19 pandemic.
| Year end |
Trading profit |
Corporation tax paid |
Loss carried back |
Tax refund (19% of loss carried back) |
|---|---|---|---|---|
| 31 June 2020 | (£400,000) | Nil | n/a | n/a |
| 31 June 2019 | £250,000 | £47,500 | (£250,000) | £47,500 |
| 31 June 2018 | £250,000 | £47,500 | (£150,000) | £28,500 |
| 31 June 2017 | £250,000 | £47,500 | n/a as current year loss fully claimed against 2018 and 2019 trading profits | n/a |
| £142,500 | £76,000 |
- Under previous loss carry back rules: A tax refund of £47,500 would have been available to ABC Ltd.
- Under the extended loss carry back rules: A tax refund of £76,000 will be available to ABC Ltd.
- If the current year loss had been between £500,001 – £750,000: ABC Ltd would have been able to carry back losses into the 2017 accounting year.
- If the current year loss had been greater than £750,000: ABC Ltd would have been able to reclaim £142,500 (750,000 x 0.19) which covers their past 3 years trading profit. They would then be able to carry forward any unrelieved losses to set against trading profits in future tax years.
Contact us
Our tax team can assist clients with their carry back loss claims as part of our annual business tax compliance service, or as a standalone service. Please contact us to discuss how our team can assist your business.
With more than 20 years in tax, Paul provides tax compliance and advisory services to clients, and specialises in R&D and capital allowance claims.