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Corporation Tax Loss

Profit is the positive financial gain a business makes after you’ve subtracted all the business’ expenses.  Every business likes to make a healthy profit but sometimes a corporation tax loss happens simply because the business is very new, or costs have unexpectedly risen, or other factors that cause the company low turnover.

But COVID-19 has thrown another dimension into the mix, seeing thousands of companies fail to turn a profit when in ‘normal’ times this wouldn’t have been an issue. When this happens what are your options in the UK around dealing with a Corporation Tax Loss?

If my business suffers a Corporation Tax Loss, do I need to do a tax return?

You must submit a tax return to HMRC each year, regardless of whether you have made a profit or a corporation tax loss.

It is beneficial to submit a tax return to HMRC as the loss can be carried forward and offset against any future profits. Alternatively, the loss can be offset against any other income during that financial year which could result in a tax rebate.

If you make a trading loss and it cannot be used in the same year, you may be able to choose to carry it back to earlier accounting periods, or it will be carried forward to be set off against the profit for future periods.

 

CARRY BACK A CORPORATION TAX LOSS

Under general rules businesses can carry back trading losses from one year, and put them against profits in the previous year. This basically reduces the amount of profit for the previous year, and less profit means a lower tax bill.

But because the business has already paid its tax bill for the previous year, it can then claim a reimbursement of the Corporation Tax or Income Tax it paid in that previous year in a form of tax rebate.

The corporation tax loss carryback period is usually 12 months, meaning that the trading loss can be carried back and offset against the previous 12 months

  • A limited company offsets the losses against any profits in the same accounting period, and can then claim to offset the remaining loss against its total profits from the previous 12 months.
  • To carry back losses against income tax, a person can offset their trading losses against their net income from the current year, the previous year, or both.

Temporary extension to carry back of trading losses

A temporary extension to the rules for tax-loss relief, both for individuals and companies was announced by the Government in its Budget on 3rd March 2021.

This will give rise to a further option for loss relief, allowing a claim to be made to offset a trade loss for 2020-21 against trade income for 2019/20, 2018/19 and 2017/18, subject to a cap of £2 million.

With many businesses having suffered due to the impact of COVID-19, now is a great time to review the potential to maximise corporation tax loss claims.

The new rules will allow companies with accounting periods ending between 1st April 2020 and 31st March 2022 to carry back trading losses to an extended period of the previous three years, offsetting against profits in the most recent year first. For sole traders, trade losses of tax years 2020/21 and 2021/22 can claim additional relief by carrying back unrelieved losses and setting these against profits of the same trade for three years before the year of the corporation tax loss.

 

How to file?

Claims over £200,000 must be made in a company tax return (CT600). Box 45 (claim or relief affecting an earlier period) on the return should be completed, and details of the carryback claims included in the computations that accompany the return and accounts.

There’s no need to submit amended returns for any earlier periods the extended relief applies to, as claims will be treated as amendments to those returns.

Claims below the £200,000 limit can be made outside of the company tax return.

 

CARRY FORWARD A CORPORATION TAX LOSS

Your company can carry trading losses forward to deduct from profits of future accounting periods as long as the trade continues.

If your company made the loss:

  • Before 1 April 2017, it can only be used against profits of the same trade
  • On or after 1 April 2017, it can normally be used against your company’s total profits. If your company is part of a group and has carried forward trading losses made on or after 1 April 2017, other companies in the group may be able to use those losses. This is called group relief for carried forward losses.

 

How to file?

Enter these in box 285 on your Company Tax Return.

If your company has carried forward trading losses that it made on or after 1 April 2017, it can generally use them against its total profits. Trading losses from before 1 April 2017 cannot be used in this way.

You can specify how much of this type of loss your company wishes to use. You can use the full amount, or you can:

enter less than the full amount available

use none in this period by putting a 0

 

PLANNING TIPS FOR COMPANIES

Remember that corporation tax rates are to set rise from 19% to 25% in April 2023. The Government will introduce a new Small Profits Rate of 19% for companies with annual profits of £50,000 or less. Companies with profits between £50,000 and £250,000 will pay tax at the main rate of 25% reduced by a marginal relief providing a gradual increase in the effective Corporation Tax rate.

So, for companies who may have to pay the new 25% rate and who are able to use the extended loss carryback opportunity, they will need to consider the respective benefits of claiming a corporation tax loss refund now at 19% or carrying forward losses into where they may attract relief at 25%.

This will very much depend on your particular situation as you may prefer to claim a refund now and aid your current cashflow position rather than wait.

If you have losses from as a Sole Trader and are transferring your business to a Limited Liability Company, you can transfer these losses. See more on this in another of our blogs here 

To know more about UK taxation and tips on Expenses, and Cash flow management, please visit our website section about our Libabun Accountancy services

To find out more on UK Tax Rate and how to minimise your losses, check out another of our blogs on the UK Tax Rates.

Libabun Accountancy  is part of our Libabun Business Services Agency.  Our purpose is “Building better businesses, greater lifestyles!”

Our Agency is made up of a number of different business services that support each other to offer our clients synergies not heard of before.  The LibAbun Business Services Agency includes;

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Please refer to our main website at libabun.com  for more details.