Corporation Tax – Losses and extensions post-Pandemic

Tax Talk - April 2022

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Although the UK may have entered the phase of ‘living with Covid’, companies can still take advantage of Corporation Tax measures introduced during the Pandemic to help ease cash-flow.

From a Corporation Tax standpoint, the most relevant measure introduced was in relation to the ‘Extended Loss Carry Back Claims’ where temporary measures were introduced to help businesses that may have previously been profitable but then found themselves making losses over two years due to difficult trading conditions caused by the Pandemic.

The original rules

In simplistic terms, the loss carry-back rules allow a company, subject to trading conditions, to set off trading losses incurred during an accounting period against total profits of the same accounting period and carry back any excess trading losses and offset these against trading profits of the preceding 12-month period.

Where the preceding accounting period is for longer than 12 months, only the profits falling within the relevant 12-month period can be relieved.

Where a company instead ceases trading, and a loss is sustained in the final accounting period of trading, the losses incurred during that accounting period can be carried back to the preceding three years, with the losses being offset against profits incurred in later years first.

The Covid temporary extension

The temporary extension introduced by the government permitted companies, subject to the same trading conditions, to carry back excess trading losses incurred during accounting periods ending any time in the two years between 1 April 2020 and 31 March 2022 against trading profits incurred during the preceding three years (instead of the usual 12 months).

There is a £2m cap on the amount of losses that can be carried back to the two earlier years, which applies separately to accounting periods ended between 1 April 2020 and 31 March 2021 and those ending between 1 April 2021 and 31 March 2022. Group companies are subject to a group cap of £2m for each period.

Submitting a claim

For companies looking to claim a loss carry back of less than £200,000 there is a further concession. Although most claims under the temporary extension need to be made by submitting a Corporation Tax Return to HMRC, the temporary rules permit such claims to be made even if their annual financial statements, and thereby the corporation tax return, are not yet complete.

Such claims can be made as soon as the losses are ‘established’ – effectively, once the relevant accounting period in which the losses have been incurred has ended and can be evidenced by management accounts prepared for the relevant period.

Time Limit:

Companies have two years from the end of the relevant loss-making accounting period in which to make a claim. So, for example, for losses incurred during an accounting period ended 30 June 2020, the deadline for making a claim under the temporary extension provisions will be 30 June 2022.

In the above scenario, though there is potential for losses to be carried back to offset profits that arose between 1 July 2016 – 30 June 2019, where the June 2022 deadline is missed, the availability of loss utilisation against profits made in the period between 1 July 2016 and 30 June 2017 may be lost.

Relief today or relief tomorrow? A final word of caution

While the temporary extension rules are undoubtedly favourable, companies should consider alternative ways of using their losses. With Corporation Tax rates set to rise from 1 April 2023, some may prefer to keep hold of their losses and obtain relief on future profits at 25% rather than make a claim under the temporary extension and receive a refund at 19%.

Every company is different, and factors including cash flow and the future viability of the trading company or profits all need to be taken into account. The PKF Corporation Tax team can help you make the right decision.

Written by Ivy Ojediran in our London office.