Temporary extension to carry back of trading losses for Corporation Tax and Income Tax
Published 3 March 2021
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Who is likely to be affected
All companies and unincorporated businesses making losses from carrying on trades, professions or vocations.
General description of the measure
Legislation will be introduced in Finance Bill 2021 to temporarily extend the period over which businesses may carry trading losses back for relief against profits of earlier years to get a repayment of tax paid.
Policy objective
This is one of several measures announced by the government to assist incorporated and unincorporated businesses that may have suffered economic harm from the coronavirus (COVID-19) outbreak.
Some businesses have experienced reduced demand for their products and services, or disruption to their supply chains as a result of the outbreak and associated restrictions. This has led to increased trading losses in the short term for many businesses.
This measure will provide a cashflow benefit to affected businesses by providing additional relief for trading losses, thereby generating repayments for tax paid for 2 additional years.
Background to the measure
The government announced this measure at Budget 2021 to support businesses in response to the coronavirus outbreak.
Detailed proposal
Operative date
This measure will have effect for company accounting periods ending in the period 1 April 2020 to 31 March 2022 and for tax years 2020 to 2021 and 2021 to 2022 for unincorporated businesses.
Current law
For Corporation Tax, current law is contained in section 37 Corporation Tax Act 2010. A company incurring a trading loss in an accounting period can make a claim to offset the loss against total profits of the previous 12 months after first having set the losses against any profits of the accounting period in which the loss occurred.
For Income Tax, current law is contained in section 64 Income Tax Act 2007.
A person incurring a trading loss in a tax year can make a claim to offset losses against the person’s net income of the current year, the previous year or both years.
Proposed revisions
Legislation will be introduced in Finance Bill 2021 to extend the period for which trading losses can be carried back against previous profits. This extension will apply to trading losses made by companies in accounting periods ending between 1 April 2020 and 31 March 2022 and to trading losses made by unincorporated businesses in tax years 2020 to 2021 and 2021 to 2022.
Trade loss carry back will be extended from the current one year entitlement to a period of 3 years, with losses being carried back against later years first.
Corporation Tax
The amount of trading losses that can be carried back to the preceding year remains unlimited for companies. After carry back to the preceding year, a maximum of £2,000,000 of unused losses will be available for carry back against profits of the same trade to the earlier 2 years. This £2,000,000 limit applies separately to the unused losses of each 12 month period within the duration of the extension.
This means a cap of £2,000,000 on the extended carry back of losses incurred in accounting periods ending in the period 1 April 2020 to 31 March 2021 and a separate cap of £2,000,000 on the extended carry-back of losses incurred in accounting periods ending in the period 1 April 2021 to 31 March 2022.
The £2,000,000 cap will be subject to a group-level limit, requiring groups with companies that have capacity to carry back losses in excess of a de minimis of £200,000 to apportion the cap between its companies.
Income Tax
The amount of trading losses that can be carried back by individuals to set against profits of the preceding year remains unlimited. The current restrictions to carry back losses from a trade against general income will remain.
A separate £2,000,000 cap will apply to the extended carry back of losses made in each of the tax years 2020 to 2021 and 2021 to 2022.
This £2,000,000 limit applies separately to the unused losses of each tax year within the duration of the extension. Income Tax payers will not be subject to a partnership-level limit.
Summary of impacts
Exchequer impact (£m)
| 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 |
|---|---|---|---|---|---|
| -840 | -205 | +580 | +325 | -160 | +80 |
These figures are set out in Table 2.1 of Budget 2021 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2021.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
There is no impact on individuals as this measure only affects businesses.
This measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
It is not anticipated that this measure will impact on groups sharing protected characteristics.
Impact on business including civil society organisations
This measure is expected to have a positive impact for companies and unincorporated businesses by temporarily extending the period over which they may carry trading losses back for relief against profits of earlier years to get a repayment of tax paid.
It will ease their financial pressures and help them to keep their businesses afloat. It is expected to have a negligible impact on the administrative burdens of upward of an estimated 130,000 companies and 500 unincorporated businesses that will receive additional relief for their trading losses.
One-off costs will include familiarisation with the new rules.
There are not expected to be any continuing costs.
Customer experience is expected to stay broadly the same for the majority of companies as the process for claiming relief remains the same as for existing rules. However, for a minority of companies that will have the additional requirement to apportion the £2 million cap, customer experience could worsen.
However, this is a minor administrative requirement and these companies may already be doing this for loss restriction purposes.
This measure is not expected to impact civil society organisations.
Operational impact (£m) (HMRC or other)
Implementation is likely to have a significant operational impact and will necessitate some changes to HMRC IT systems and online filing products.
HMRC costs including both IT and operational costs to implement this measure are estimated to be approximately £17 million.
Other impacts
Other impacts have been considered and none has been identified.
Monitoring and evaluation
This measure will be monitored and assessed alongside the government’s package of Coronavirus support measures.
Further advice
If you have any questions about this change, please contact Eva Upali (CT) on Telephone: 03000 542 465 or email: [email protected], or Daniel Shaw (IT) on Telephone: 03000 511 123 or email: [email protected].