New legislation - HMRC refund for trading losses

Last year was a year that many will want to forget.  With the arrival of Covid-19 into our lives, and then various lockdowns being an essential part of containing the virus, many businesses have been hit hard. 

Whilst the furlough scheme went a long way in assisting with ongoing staffing costs it did not counter the remaining fixed costs, such as rent, that businesses were still expected to pay whilst their turnover reduced, often dramatically.

A variety of government-backed loan schemes were run alongside the furlough scheme, but these will ultimately need to be repaid.  

Fortunately, there is some more permanent help available.  In Budget 2021 the Chancellor announced that trading losses incurred by companies in accounting periods ending between 1 April 2020 and 31 March 2022 could be carried back for three years instead of the usual 12 months. 

The new legislation applies to businesses of all sizes, however there is a £2m cap on losses carried back more than 1 year.

The result of carrying back a loss is that tax previously paid on profits of earlier years is refundable by HMRC.  This will create a repayment of 19 per cent of the losses utilised, providing a vital cash injection to companies in need of support.

Example

Pub Business Ltd has previously been a successful business, generating consistent profits of £100,000 per annum.  As a result of COVID-19 the loss in the year ended 31 December 2020 was £150,000. 

Under the temporarily extended loss carry back rules, Pub Business Ltd is able to utilise this loss as follows:

Year End

Profit/(Loss) £

Corporation Tax Paid Originally £

Losses Offset £

Tax refundable £

31 December 2017

100,000

19,000

Nil

Nil

31 December 2018

100,000

19,000

(50,000)

9,500

31 December 2019

100,000

19,000

(100,000)

19,000

31 December 2020

(150,000)

Nil

150,000

Nil

57,000

28,500

The net impact of the above is that £28,500 of the tax originally paid by the company is now refundable by HMRC, directly to the company’s bank account.

There is usually a requirement that loss carry back claims are made in a company’s Corporation Tax return.  However, the rules are relaxed slightly for claims of £200,000 or less as the legislation allows these to be claimed by writing to HMRC, outside of the tax return process, in a bid to speed up the availability of cash to struggling businesses. 

Evidence supporting the value of the loss must of course be provided to HMRC if the informal route is taken, but this could take the form of management accounts or summaries taken from the accounting records.

As with all things in the tax world, there are various quirks and loopholes to be aware of which emphasise the need for a trusted business advisor. If your business has struggled with losses in these unprecedented times, with the correct advice and guidance there may be a light at the end of the tunnel. 

There will inevitably be a backlog of these claims for HMRC to process, so now is the time to act to secure your place in the queue and receive cash refunds to support your business as soon as possible.

Our team of trusted business advisors are on hand to offer strategic tax planning and to ensure you remain compliant. To discuss your business and efficient tax planning, contact [email protected]