Enhancement to Corporation Tax and Income Tax loss relief rules

Following the Budget in March, the Government has announced changes to how trading losses of both Limited companies and unincorporated businesses can be utilised.

The previous legislation meant that any trading losses could only be carried back 12 months.

This new enhancement means that trading losses made by companies in accounting periods ending between 1 April 2020 and 31 March 2022 and also to trading losses made by unincorporated businesses in tax years 2020 to 2021 and 2021 to 2022 can now be carried back a further two years.

The loss must be set against the preceding year first and can then be carried back to the previous two years, up to a maximum of £2m of losses.

So even if you have already filed Accounts and Tax Returns for accounting periods ending after 1 April 2020, you are still able to claim back such tax refunds.


Suppose your company’s accounting year-end is 30 June 2020, and you have made a tax loss of £10,000, for which £5,000 was only available to carry back against the previous year. In that case, the new legislation means that the remaining £5,000 which you would have previously carried forward can now be carried back to the year ending 30 June 2018 or 2017. Doing this means your company would obtain a tax refund of £950.

This temporary legislation change is said to recognise ongoing trading and cash flow difficulties and provide businesses with an opportunity to receive a much-needed cash boost by refunding taxes paid in previously profitable years.

Over the past 12 months, many smaller businesses may have experienced trading difficulties but have ambitions of returning to a sense of normality.

This potential tax-reducing opportunity could well be what your business needs in current circumstances, whether it be to provide Working Capital, pay other debts or invest in new equipment. Even if you have carried back part of your loss to only last year, you can still file again to access further cash.

While writing, if you are a Limited company and also looking to invest in new equipment for your business, you could also spend the additional cash on qualifying plant and machinery, which, if purchased after 1 April 2021, also qualifies for a ‘Super Deduction’ on the Capital Allowances claim. This means 130% of the expenditure is available to offset against future trading profits.

Using my example earlier, if the £950 tax refund were to be spent by your company on qualifying plant and machinery, this would reduce your current year tax charge by £235.

This article was written by James Elvin, Manager at Price Bailey LLP. For any questions regarding this article, you can contact James on the form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.


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