Trading losses – carry back or carry forward?

In the March 2021 Budget, it was announced that the existing rules for carrying back trading losses for one year would be extended temporarily to allow businesses to carry them back against profits for the last three years. This allows businesses that have made losses during the COVID-19 pandemic the option to obtain a repayment of tax paid in that earlier three-year period.

The enhanced carry back applies to unincorporated businesses as well as limited companies, and will provide a much-needed tax refund for those businesses that are facing cash flow difficulties as a result of the losses.

However, with corporation tax rates rising for many businesses from 1 April 2023 (up to 25% where profits exceed £250,000) it may be more beneficial to carry the loss forward for relief against future profits, rather than carrying them back against the previous three years. This therefore poses two options;

1. carry back the losses and obtain tax relief at 19% of the losses, and receive the cash benefit of this as soon as HMRC have processed the claim
2. carry forward the losses and offset them against future profits, obtaining relief at up to 25% of the losses. This would lead to a delay in the cash benefit of utilising the losses until the date at which tax on the future profits is due

The temporary enhanced carry back rules can be applied to losses arising in accounting periods that ended between 1 April 2020 and 31 March 2022 for companies, and financial years 2020/21 and 2021/22 for unincorporated entities.

For more information on this, please contact James Flood on 023 8046 1244.