After the numerous schemes introduced by the Government to assist businesses over the past year, you would be forgiven for losing track of who is entitled to claim and what they are entitled to. Certainly, I wouldn’t pass an exam in the subject despite having a partner who has received assistance with her businesses through these difficult times. However, I am always listening out for announcements that could benefit my private clients.
Step forward ‘Extended Loss Carry Back for Businesses’, introduced through the Finance Act 2021.
With those individuals involved in the night-time economy and retail sectors particularly badly hit, it is commendable that something has been done to address the downturn in trade from a tax loss perspective. Although I will be concentrating on relief available to unincorporated businesses here, similar provisions exist to assist companies, which is scant consolation for those company Directors who failed to receive much in the way of furlough payments because they had effectively been remunerated through dividends in the lead up to the Covid pandemic. This was because dividends were not within the gambit of furlough.
The announcement that losses made in the 2020/21 and 2021/22 tax years may be taken back against trade profits for the three years prior to the year of the loss, will enable business owners to free up invaluable additional working capital through tax rebates. With the change in IFPR rules growing ever closer, this could free up some additional capital that if put back into the business, could assist in meeting requirements set out by the FCA.
The current rules for sideways loss relief mean that sole traders, partners and LLP members can offset their losses against other income of the current and or the preceding tax year in whichever order they prefer (i.e. 2020/21 first and 2019/20 second or vice versa). However, there are certain restrictions that remain in place such as the cap on reliefs to 25% of adjusted net income or £50,000, whichever is the greater.
However, there are no such restrictions for LLP members looking to offset the losses against trade profits of the preceding three years. This will be particularly useful for those in the fund management space who often see their businesses post large profits followed by a year or two of losses. A carry back to those years when tax and National Insurance was paid at a rate of 47% could result in a significant windfall. With a change in the Prudential rules imminent, this could also be advantageous in meeting regulatory capital requirements.
There is a cap of £2,000,000 on the losses being taken back to the earlier two years but this is still mighty generous.
The usual claim time limit of one year from 31 January following the tax year end applies to both years so the cut off will be 31 January 2023 (2020/21) and 31 January 2024 (2021/22).
It is worth noting that the order in which the claims are made can make a difference to how much relief can be claimed so it is important to obtain a forecast of anticipated losses (if applicable) in the tax year to 5 April 2022 (accounting periods ending within that tax year). A claim for 2021/22 losses will take priority over 2020/21 if made earlier.
All in all, this will present clients with a fantastic opportunity to recoup tax already paid if losses have been made in accounting periods ending between 6 April 2020 and 5 April 2022.
If you would like to discuss the content of this article or require tax advice in general, please contact our Head of Private Client Tax Paul Webster.