The Government announced a temporary extension of the provisions for trade loss recovery for both people and businesses in its Budget on March 3, 2021.
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This will result in a new loss relief option, enabling a claim to be made to balance a trade loss for 2020-21 against trade revenue for 2019/20, 2018/19, and 2017/18, subject to a £2 million ceiling.
With many firms suffering as a result of the effect of COVID-19, now is an excellent moment to assess the possibilities for maximizing loss claims.
Companies having accounting periods ending between 1st April 2020 and 31st March 2022 will be able to carry back trade losses to an extended period of the preceding three years, balancing against earnings in the most recent year first under the new regulations. For sole traders, trade losses in tax years 2020/21 and 2021/22 may be carried back and balanced against earnings in the same trade for three years prior to the tax year of the loss to claim further relief.
The proposed expansion would expand on the current trade loss compensation against general income.
All other existing loss reliefs will continue to be accessible.
Because the Act has not yet been implemented, HMRC is unable to give effect to loss claims, and no repayments under the extended loss carry back may be paid until the Finance Bill 2021 obtains Royal Assent. This is scheduled to happen before Parliament’s summer holiday in July.
Although we are unable to process the claims at this time, we can surely look into what alternatives are open to you and assist you in planning forward.
Planning advice for self-employed people and their relationships
When using losses, there are several planning considerations to be made. To maximize your refund, we at always attempt to set your loss against income that is subject to a higher marginal tax rate. This implies that we aim to leverage your loss against income taxed at 45 percent, then income taxed at 40%, and lastly income taxed at 20%.
If we compare your loss to other income, such as dividend income, we would attempt to save tax at the greatest marginal rate possible. In addition to maximizing the income tax claim, we would seek to maximize the Class 4 national insurance rebate, if applicable.
Personal allowances would also be considered. Setting a loss against income that is already covered by your personal allowance is pointless since it will not save you tax. In certain cases, we may be able to reinstate your personal allowance if it was lost owing to a greater income in a prior year.
Finally, time is important, as they say. We never know what the future holds, but it might be more taxes or higher earnings, so planning ahead of time on how to use losses is critical.
Tips for Business Planning
Remember that company tax rates are slated to jump from 19% to 25% in April 2023. The government will implement a new Small Earnings Rate of 19% for businesses with yearly profits of £50,000 or less. Companies with earnings of £50,000 to £250,000 will pay tax at the standard rate of 25%, lowered by a marginal reduction that provides a progressive rise in the effective Corporation Tax rate.
Companies who may have to pay the new 25% rate and are able to exploit the extended loss carry back opportunity will need to weigh the merits of claiming a tax refund now at 19% against carrying forward losses into where they may get relief at 25%.
This will be extremely dependent on your specific scenario, as you may opt to receive a refund immediately and help your current cashflow condition rather than wait.
Depending on whether earnings are dropping or growing, the date a firm picks for its year end may potentially make a big difference in the amount of its next corporation tax payment. We can also advise you on tax-saving possibilities and inform you of your alternatives.