A closer look at the 3 year loss extension

A temporary extension of the period over which businesses may carry trading losses back for relief against profits of earlier years was announced earlier this year. This will have effect for company accounting periods ending in the period 1 April 2020 to 31 March 2022 and for tax years 2020/21 and 2021/22 for unincorporated businesses. The 1st year loss carry back is unrestricted with the 2nd and 3rd years restricted to £2m offset (a limit shared by group companies). Unused losses will continue to be available for carry forward for relief against future profits.

Just how useful is this though?

The UK’s first lockdown occurred in March 2020 shortly after the Cheltenham Festival was allowed to run its course. The first covid affected trading periods are likely to end between 1 April 2020 –31 March/5 April 2021 for companies and unincorporated trades. The new rules will allow losses in this period to be carried back unrestricted to the prior year, then restricted to prior year +1 and prior year +2 in that order. This could allow for 3 profit making years to benefit and result in a tax refund.

The second covid affected trading periods are likely to end between 1 April 2021 – 31 March/5 April 2022 for companies and unincorporated trades. As prior year could be the 1st covid loss year and prior year +1 already wiped out by the earlier loss claim, this may leave just prior year +2 for loss offset if it has not already been wiped out by the earlier claim. The result could be a maximum of 1 profit year being able to generate a tax refund.

Whilst the detail behind the headlines may not be quite so enticing, it does of course depend on each businesses particular loss/profit making circumstance and year end. The extension to the loss rules remains a welcome relaxation that could produce significant tax refunds for those businesses hardest hit during the pandemic.