The normal rules allow you to carry a trading loss back to the previous year and (assuming there were taxable profits in that year) to claim a repayment of the tax charged on them. The new temporary extension allows a three year carry back, but the details are significantly different depending on whether your business is conducted through a limited company or not.
A limited company is charged to corporation tax on its profits, which include trading profits, investment income, and chargeable gains. Under the present rules, a trading loss is first set against the other income of the accounting period in which it arises, and if there are losses still unrelieved, these can either:
· Be carried forward against future profits of the same trade, or
· Be carried back to the previous accounting period and set against the company’s profits for that period – note that “profits” includes profits from all sources, including chargeable gains.
The temporary extension allows those losses to be carried back and set against the profits of the previous three accounting periods, but there are certain restrictions:
· There is no limit to the amount of loss that can be relieved against the preceding accounting period – except of course that the amount carried back cannot be greater than the profits of that previous period.
· Only if there are further losses after relief against the previous period can they be carried back to the year before, and only after all the profits of that year have been reduced to nil can any remaining losses be carried back to the year before that.
· There is a limit of £50,000 on the losses that can be carried back to the “extra” two years before the one immediately before the loss making period.
· The extended relief is only available for losses of an accounting period that ends between 24 November 2008 and 23 November 2009. For a company with a normal 12 month accounting period, this will therefore mean only one accounting period will benefit from the extended carry-back
· There are special rules to deal with companies which have accounting periods shorter than one year.
Partnerships and sole traders are also offered the extended carry-back but it is less generous. The losses can only be carried back against profits of the same trade, in contrast to the corporation tax losses which can be offset against all of the company’s profits as described above. The details of the carry-back for income tax businesses are:
· The loss that can be carried back for the extra two years is that for the tax year 2008/09.
· As with corporation tax losses, the loss is first carried back to the previous year (2007/08), and only once the trading profits of that year have been covered can any remaining losses (again subject to the £50,000 limit) be carried back to set against the trading profits of 2006/07, and if there are still any left, against those of 2005/06.
Other Loss Relief
There are other forms of loss relief available and in some cases these will be preferable to the new and temporary one described above, particularly if the trade concerned is ceasing:
· Companies can carry a loss arising in their final year of trading back against all profits of the previous three years (assuming the same trade was carried on during that period), and the £50,000 cap does not apply in this situation.
· Unincorporated businesses can do the same carry-back for three years preceding the year of cessation, but only against the profits of the same trade.
· Unincorporated businesses (but not companies) can also get extended relief for losses arising in their first four years of trading. Such losses can be carried back against all income of the three years preceding the year in which the loss is made, not just the losses of the same trade. Once again, the £50,000 cap does not apply
It remains to be seen how many businesses will be able to claim the new extended loss relief, and how many will want to. In many cases the existing reliefs are better value, but there may be some cases where the temporary extension will enable relief to be claimed where it would not be available under the normal rules. Tax planning will involve three main thought processes:
· Changing accounting dates (both for companies and income tax businesses) in order to maximise relief.
· Choosing between the various reliefs available for a specific loss – this has always been an important part of loss relief management, and for one year, there will be yet another choice to consider.
· Timing of expenditure on both revenue and capital items to seek to maximise the losses of the accounting period falling into the temporary extension of relief