Made a business loss this year? Boost your cash flow with temporary extension of trading losses carry back rules

In the March 2021 Budget, still very much in the midst of the COVID pandemic, the Treasury extended the ‘carry back’ of business trading losses rules to help struggling businesses boost their cash flow.

What are the trading losses carry back rules?

If your limited company makes a loss for accounting periods ending between 1 April 2020 and 31 March 2022, you could have the option to carry back the trading loss to set against profits incurred in the three years leading up to the period in which the loss was incurred.

In normal times, you are able to do this by carrying back by one year, not three years.

How does the carry back rules work in practice?

There is a £2 million cap on the amount of trading losses you can carry back more for three years if needed against profitable years, which means you can recoup any corporation tax paid during those profitable years.

This means a potential total cash refund of up to £760,000 is available if you utilise the full £2 million of trading losses.

This tax relief will be particularly useful for previously profitable companies in sectors that have been heavily affected by the coronavirus pandemic.

A working example

A company that makes a trading loss in their accounting year to 31 December 2021 of £100,000 would normally be allowed to ‘carry back’ to the previous accounting year to 31 December 2020. If the previous year was in profit, then the current year losses could be applied which would result in a corporation tax refund paid in the previous year. So in this example, carrying back £100,000 of losses to the previous year, which made a profit of £20,000, would mean a corporation tax refund of £3,800 (£20,000 profit x 19% corporation tax charge).

Under the new temporary extended carry back loss rules, we can go back a further two years to see if we can fully utilise the £100,000 of losses in the current year. In this example, we have £80,000 of losses to utilise and check against accounting year-end 2019, and 2018 if necessary, which is a further boost to a business’ cash flow now, when most needing emerging slowly from the pandemic.

Understand your business’ tax position

If you are looking for tailored tax advice as a business owner of a fast growing company, please get in touch to see how we can help you work both compliantly and tax efficiently.

Mirandus go beyond compliance and are with you every step of the way on your business growth journey.