Temporary extension to carry back trading losses for income tax

To support the UK economy to recover from the effects of the pandemic, businesses which have incurred trading losses in financial years 2020-21 and 2021-22 will have more flexibility to carry back the losses to three years.

Relief is available for both incorporated and unincorporated businesses; however, this article only covers the rules that apply for unincorporated businesses.

In the Finance Bill 2021, the Chancellor announced a temporary extension for the 2020/21 and 2021/22 tax years, to the carry-back of trading losses from one year to three years.

Currently, an individual incurring a trading loss in a tax year can make a claim to offset that trading loss against their net income of the current year, the previous year or both years, in any order.

There is no limit on the offset of trading losses against trading profits, however, where a trading loss is offset against other income, a cap applies on the amount of net income available for offset to the higher of £50,000 or 25% of adjusted total income (total income less pension contributions).

The changes introduced by the Finance Bill 2021 apply where relief cannot be given in full under the existing rules by allowing trading losses to be carried back and set against profits of the same trade for an additional two years, extending the existing one year carry-back to three years. This will apply to trading losses incurred in each of the tax years 2020/21 and 2021/22.

Losses will be offset against profits of the most recent year before earlier years.

This temporary extension also applies to Furnished Holiday Lettings business losses that are treated as trading losses for income tax purposes.

The time limit for making a claim for the 2020/21 tax year is 31 January 2023 and, for 2021/22 it is 31 January 2024.

A separate £2mn cap will apply to the extended carry back of losses made in each of the tax years 2020 to 2021 and 2021 to 2022. i.e. 2020/21 losses carried back against profits of 2018/19 and 2017/18 are subject to a total £2 million cap, with a separate £2 million cap for losses carried back from the 2021/22 period.

This cap applies independently of any unused trading losses incurred in each tax year for the duration of the extension.

For partnerships, the £2 million cap will apply to each partner subject to Income Tax rather and not to the partnership as a whole.

Any trading losses in excess of the £2 million cap can be carried forward and set against future profits of the same trade.

The temporary extension will no doubt provide a welcome cashflow benefit to businesses which have suffered increased trading losses as a result of the COVID-19 pandemic so it is advisable to submit your tax returns at the earliest opportunity after the end of the tax year in order to generate tax repayments.