Companies with on-going trades have always been able to carry back surplus trading losses incurred in an accounting period to the previous 12 months, to reduce taxable profits of the earlier period and generate a cash tax refund. The 12 month carry back of trading losses has been temporarily extended to a 3 year carry back and for many companies this extended trade loss carry back will generate a welcome and valuable tax refund from HMRC. However, the Finance Bill clauses published on 11 March 2021 to enact this temporary extension are complex and contain limitations which reduce its apparent generosity.
The rules allow a three year carry back of trading losses from accounting periods ending in the period 1 April 2020 to 31 March 2022 (accounting periods ending in the year to 31 March 2021 generating a “2020 claim”, accounting periods ending in the year to 31 March 2022 generating a “2021 claim”).
The main limitation is a £2m restriction on the amount of losses that can be carried back more than 12 months (there is no restriction on the amount of losses that can be carried back 12 months). The £2m restriction is a separate restriction for a 2020 claim and a 2021 claim, resulting in a maximum £4m loss carry back over the two year extension. It is also a groupwide restriction - i.e. within a group the maximum amount of losses that can be carried back more than 12 months is £2m for all 2020 claims, and £2m for all 2021 claims (unless all group companies make de minimis claims, as described below).
The rules distinguish between ‘de minimis’ and ‘non-de minimis’ claims. Broadly a claim is de minimis if the amount carried back more than 12 months is less than £200k. The significance of the distinction is twofold: i) de minimis claims can be made outside the tax return, so potentially lead to earlier refunds of tax; and ii) if all claims within a group are de minimis claims, the £2m groupwide restriction does not apply. But should one company exceed the de minimis threshold, the £2m group cap is triggered.
In a similar manner to the process for claiming the group deductions allowance, groups will be required to submit a ‘loss carry-back allocation statement’ to determine which companies in the group may make claims (unless all the claims are de minimis claims).