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New enhanced Loss Relief rules may result in extra tax refunds

In the March Budget it was announced that the normal one year carry back for trading losses would be extended to three years. This means that many businesses that have made losses during the COVID-19 pandemic may be able to obtain a repayment of tax paid in the previous three years. This enhanced carry back applies to unincorporated businesses as well as limited companies.

The maximum amount of loss that can be carried back under the extended rules is £2 million for each of the two affected accounting years – which should be more than enough to give a large number small and medium sized businesses the ability to accelerate tax relief on all of their losses during the pandemic.

For corporation tax purposes the loss-making accounting period must end between 1 April 2020 and 31 March 2022 to qualify for the three year carry back. For unincorporated businesses, the trading loss must be incurred in 2020/21 or 2021/22.

For example, if Albion Ltd incurred trading losses of £200,000 in year ended 31 December 2020 having made profits of £50,000 in year ended 31 December 2019 it would normally only be possible to relieve £50,000 of the losses.

The new temporary carry back rules would permit losses to be set against trading profits made in the years ended 31 December 2018 and then 31 December 2017 as well. If profits in those years combined were £150,000 or more then the company would be entitled to a £38,000 corporation tax refund (19% of £200,000).

There may in fact be many companies that have already filed a Corporation Tax Return for a period ending after 31 March 2020 that may now be able to revise that return to make an additional loss claim.

The changes also provide more flexibility for companies claiming R&D Tax Relief. When we complete these claims, we automatically check that any losses created by the R&D can be carried back before we claim a payable tax credit, because carrying the loss back recovers tax at 19% of the loss, as opposed to a tax credit of 14.5%. With the possibility to now go back three years, this gives more potential opportunity to obtain the higher level of Corporation Tax relief.

Of course, every scenario is different – to discuss your situation please speak to James Geary or Gina Gardner in our tax team to ensure you are maximizing the available cash flow advantages. Contact us on 01242 776000 or tax@randall-payne.co.uk.

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