If you have suffered losses as a result of the Covid-19 pandemic, you may be able to claim tax relief for those losses, and possibly generate a tax repayment in the process. The options for relieving losses will depend on whether you operate your business as an unincorporated business, or whether you operate through a limited company, and also where you are in your company’s lifecycle. If you are an unincorporated business, the available options will also depend on whether you use cash basis accounting.
When looking to optimise the relief for a loss, as a general rule you should try to obtain relief for the loss as early as possible and at the highest possible rate. You may need to choose which of these takes priority.
Unincorporated businesses
If you run an unincorporated business, for example, if you are a sole trader or a partner in a partnership, there are various ways in which you can obtain tax relief for a trading loss.
Option 1 – against general income of current and/or previous year
If you realise a trading loss, you can claim relief against your total income of the year of the loss and/or the previous tax year. This is useful if you have other income. The claim can also be extended to capital gains in certain circumstances. However, sideways relief (against other income of the same year) and relief against capital gains is not available if you use cash basis accounting.
Where the loss is carried back and set against income of a previous year, this may trigger a repayment of tax already paid.
Claims cannot be tailored to preserve your personal allowance – the loss must be set in full against the income of the year for which relief is claimed. This may result in your personal allowance being fully or partially lost.
Option 2 – extended carry-back for 2020/21 and 2021/22 losses
As a temporary measure, losses for 2020/21 and 2021/22 can be carried back and set against your trading profits for the previous three years.
Where you cannot fully relieve a loss for 2020/21 under option 1 above, the extended carry-back rules allow you the additional option of carrying it back against trading profits of 2018/19 and 2017/18. Relief is given against the income of a later tax year first. Likewise, you can carry back a loss for 2021/22 which has not been fully utilised under option 1 above, against trading profits of 2019/20 and 2018/19. Where a claim has been made under option 1 above for any year, this takes precedence.
Losses which you can carry back under these rules are capped at £2 million a year. Carrying the loss back may generate a welcome tax repayment.
Option 3 – carry forward against future trading profits
Where you cannot be relieve the loss under options 1 and 2 above (or option 4 below), you can carry the loss forward and set it against future profits of the same trade. You may prefer this option if carrying the loss back would result in the loss of your personal allowance.
Option 4 – loss in the early years
If your business is new and you make a loss in the year in which start your trade or any of the following three years, you can set the loss of your net income of the three previous tax years, using the losses of the earliest year first. However, this option is not available if you prepare your accounts using the cash basis.
Option 5 – terminal loss
If you stop trading and you make a loss in the final 12 months of your trade, you can carry the loss back against the profits of the same trade for the period of the loss and the previous three tax years.
Losses cap
Any losses that you relieve under options 1 (excluding any extension to capital gains) and 3 are subject to a cap of £50,000 or 25% of your net income if higher.
Companies
If you run your business as a limited company, the following options are available for relieving the loss.
Carrying a loss back may generate a much-needed tax repayment.
Option 1 – against total profits of the same accounting period
You can relieve a trading loss in an accounting period against total profits, including chargeable gains, of the same accounting period. If you have made a trading loss as a result of the impact of Covid-19, but also realised chargeable gains in the same period, you can relieve the loss against those gains.
Option 2 – against profits of a preceding period
If you are unable to fully relieve a loss under option 1 above, you can carry the loss back against profits of a previous accounting period.
Option 3 – extended carry back
If you incurred losses in accounting periods ending between 1 April 2020 and 31 March 2022 you can benefit from an extended carry back period. You can carry the loss back (to the extent it cannot be relived under option 1) against the profits of the same trade for the preceding three accounting periods. The loss is set against profits of a later year before an earlier year. Losses for an accounting period which can be carried back under these rules are capped at £2 million.
Option 4 – carry forward against future profits
Losses can be carried forward and set against trading profits of the same trade.
We can help
As you will realise, after reading this fact-sheet, working out which is the best
way to utilise losses is not a task for the faint-hearted. If you have made a loss because of the impact of the Covid-19 pandemic, we can help you consider your options.
In particular, we will work out which claim will result in the maximum recovery of taxes paid in previous years.