Insights

In recognition of the issues facing businesses as a result of the COVID-19 pandemic, the government has made new grants and loans available for business owners. It has also extended the period during which trading losses can be carried back for tax relief purposes.

Losses could previously be carried back for one year only except on cessation of a business; this has now been extended to three years for trading losses made during the tax years 2020/21 and 2021/22.

This broadly means that if your unincorporated business had previously made a profit but has made a loss in either of the above tax years as a result of the COVID-19 pandemic, you are able to carry the loss back and reclaim tax paid against profits from the same trade in  the previous three tax years. This extension also acknowledges that difficulties may continue for affected businesses as they emerge from lockdown and begin trading again.

There is a similar extension to loss carry back for limited companies, but the rules are slightly different.

Rules for extended unincorporated business loss carry back

Loss relief must first be offset against profit of the most recent year first.

There is no cap on the amount of loss that can be carried back for one year, but the maximum amount that can be carried back to the earliest two of the three years of carry-back is capped at £2,000,000 in total.

Extended loss carry back is available for all unincorporated businesses carrying on a trade, profession, or vocation.

The £2,000,000 cap is not pro-rated for short accounting periods.

Example

Jamie’s Gym is a small unincorporated business. It makes a loss in the year to 31 March 2021. Previously it would have been possible to carry this loss back to offset against trading profits of the year to 31 March 2020 only. If those profits had been less than the loss, any remaining loss would have to be carried forward.

Under the new rules, once the 2020 profits have been fully offset, up to £2m of any remaining losses can be carried back against profits arising in the years ended 31 March 2019 and, if necessary, 2018.

Any extended relief available should always be offset against profits of the most recent years first. For example, a loss from 2020 is to be carried back to 2019 before 2018, and then to 2018 before 2017.

Claims must be made within two years of the end of the accounting period in which the loss being carried back arises.

All claims must be made on a tax return, however if the claim is £200,000 or lower, it can be submitted before the tax return is due.

If you need help with accessing the loss carry back extension for unincorporated business, contact us via partners@rjp.co.uk.