Income Tax – temporary extension to carry-back of trading losses

Clause 18 and Schedule 2 of Finance Bill 2021 provide 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. The amount of unused trade losses carried back and set against profits of the preceding year remains unrestricted. However, the carry-back to the second and third years will be limited to £2 million, although up to £2 million of losses from each tax year can be carried back. This extended relief will also be available for losses of a furnished holiday lettings business that are treated as trading losses for income tax purposes. This will provide a welcome cashflow benefit to businesses which have suffered increased trading losses as a result of the COVID-19 pandemic by providing extended relief for those losses, thereby generating additional repayments of tax.

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. There is no limit on the offset of trading losses against trading profits, however, where a trading loss is offset against other (general) income, restrictions apply to limit the offset to the higher of £50,000 or 25% of adjusted total income. (Note: special rules apply for losses in the early years of a trade and on termination of a trade).

The changes introduced by the Finance Bill 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, thereby 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.

A separate £2 million cap will apply to the amount of trading losses that can be carried back to each of the previous two and three years, 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 within the duration of the extension.

For partnerships the £2 million cap will apply to each partner subject to Income Tax rather than to the partnership as a whole.

Where trading losses exceed the £2 million cap, any balance can be carried forward and set against future profits of the same trade.

This extended relief will also be available for losses of a furnished holiday lettings business that are treated as trading losses for income tax purposes.

For businesses incurring losses as a result of the pandemic, claims can be made to carry back losses and obtain repayments of tax. The time limit for making a claim for the 2020/21 tax year is 31 January 2023 and, for 2021/22it is 31 January 2024.

Businesses in a loss-making position are advised to submit their tax returns at the earliest opportunity after the end of the tax year in order to generate tax repayments which will assist cashflow.

The temporary extension to the carry back of trading losses will also apply to incorporated businesses for corporation tax purposes.