Temporary extension of operating loss carryback for corporation and income tax

Who is likely to be affected

All companies and unincorporated businesses that incur losses while exercising trades, professions or vocations.

General description of the measure

Legislation will be introduced in the 2021 Finance Bill to temporarily extend the period in which businesses can carry forward business losses for relief from previous years’ profits to obtain a refund of tax paid.

Political objective

This is one of several measures announced by the government to help incorporated and unincorporated businesses that may have suffered economic harm due to the coronavirus (COVID-19) outbreak.

Some businesses have experienced reduced demand for their products and services, or disruption to their supply chains due to the outbreak and associated restrictions. This has led to increased short-term business losses for many businesses.

This measure will provide a cash flow benefit to affected businesses by providing additional relief for business losses, thereby generating refunds of taxes paid for an additional 2 years.

Context of the measure

The government announced this measure in the 2021 budget to support businesses in response to the coronavirus outbreak.

Detailed proposal

Effective date

This measure will apply to corporate fiscal years ending in the period April 1, 2020 to March 31, 2022 and to taxation years 2020 to 2021 and 2021 to 2022 for unincorporated businesses.

Current law

For corporation tax, the current law is contained in Section 37 of the Corporation Tax Act 2010. A company which suffers a trading loss in an accounting period may claim to set off the loss against the total profits of the preceding 12 months after first applying the losses to any profits of the accounting period in which the loss happened.

For income tax, the current law is contained in Section 64 of the Income Tax Act 2007.

A person who incurs a business loss in a tax year can claim loss offset against their net income for the current year, the previous year, or both years.

Proposed revisions

Legislation will be introduced in the Finance Bill 2021 to extend the period during which trading losses can be carried forward against previous profits. This extension will apply to operating losses realized by companies during accounting periods ending between April 1, 2020 and March 31, 2022 and to operating losses realized by unincorporated businesses during the years of taxation 2020 to 2021 and 2021 to 2022.

The carry-forward of business losses will be extended from the current one-year entitlement to a 3-year period, with losses being carried forward first.

Corporation tax

The amount of operating losses carried over to the previous year remains unlimited for companies. After carrying forward to the previous year, a maximum of £2,000,000 of unused losses will be available to carry forward against profits from the same transaction to the previous 2 years. This limit of £2,000,000 applies separately to unused losses from each 12 month period during the term of the extension.

This means a £2,000,000 cap on extended loss carryback incurred in accounting periods ending between 1 April 2020 and 31 March 2021 and a separate £2,000,000 cap on extended loss carryback incurred during the accounting periods ending in the period from April 1, 2021 to March 31, 2022.

The £2,000,000 cap will be subject to a group-level limit, requiring groups whose companies have the ability to carry forward losses above a de minimis amount of £200,000 to split the cap between their companies.

Income tax

The amount of commercial losses that can be carried forward by individuals against the profits of the previous year remains unlimited. Current restrictions to carry forward losses from a trade against general income will remain.

A separate cap of £2,000,000 will apply to the extended carryback of losses realized in each of the tax years 2020 to 2021 and 2021 to 2022.

This limit of £2,000,000 applies separately to unused losses from each tax year during the term of the extension. Taxpayers will not be subject to a limit at the level of the partnership.

Summary of impacts

Impact on Treasury (£m)

These figures are presented in Table 2.1 of the 2021 budget and have been certified by the Office for Budget Responsibility. More details can be found in the policy costing paper released alongside the 2021 budget.

Economic impact

This measure is not expected to have significant macroeconomic implications.

Impact on individuals, households and families

There is no impact on individuals since this measure only affects businesses.

This measure should not affect the formation, stability or breakdown of the family.

Equalities impacts

This measure is not expected to have an impact on groups sharing protected characteristics.

Impact on businesses, including civil society organizations

This measure is expected to have a positive impact on corporations and unincorporated businesses by temporarily extending the period during which they can carry forward business losses against profits from previous years to obtain a refund of tax paid.

This will ease their financial pressures and help them keep their business afloat. It is expected to have a negligible impact on the administrative burdens of approximately 130,000 businesses and 500 unincorporated businesses that will receive additional relief for their business losses.

One-time costs will include familiarization with the new rules.

There should be no ongoing costs.

The customer experience should remain broadly the same for the majority of businesses, as the repair request process remains the same as under the existing rules. However, for a minority of businesses that will have the additional obligation to spread the £2m cap, the customer experience could deteriorate.

However, this is a minor administrative requirement and these companies may already do so for loss limitation purposes.

This measure should have no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

The implementation is likely to have a significant operational impact and will require some changes to HMRC’s IT systems and online filing products.

HMRC’s costs, including IT and operational costs to implement the measure, are estimated to be around £17million.

Other effects

Other impacts were taken into account and none were identified.

Monitoring and evaluation

This measure will be monitored and evaluated alongside the government’s coronavirus support package.

Additional tips

If you have any questions about this change, please contact Eva Upali (CT) on phone: 03000 542 465 or email: eva.upali@hmrc.gov.uk, or Daniel Shaw (IT) on phone: 03000 511 123 or by email: daniel.shaw@hmrc.gov.uk.