How to Carry Back or Forward Losses for Corporation Tax!
In the ever-changing landscape of taxation, understanding how to carry back losses for corporation tax is vital for businesses. The year 2023 brings specific considerations and rules that companies must be aware of to make the most of their trading losses. This article explores the details of carrying back losses for corporation tax in 2023.
Understanding Trading Losses
Trading losses occur when a company's income is less than its allowable expenses within an accounting period. These losses can be offset against profits, reducing corporation or income tax. The carry-back period, which was temporarily extended to three years due to the COVID-19 pandemic, allows businesses to claim tax relief on their trading losses.
Thus the trading profit or loss for Corporation Tax purposes is determined by making standard tax adjustments to the profit or loss figure shown in your company or organisation’s financial accounts.
Calculating a Trading Loss
To compute a trading loss, you should:
Include any capital allowances (which increase the loss).
Include any balancing charges (which decrease the loss).
Exclude any losses or gains made on the sale or disposal of assets.
Include specific annuities and charitable donations (referred to as ‘trade charges’).
If a trading loss is made and cannot be used in the same year, it may be carried back to earlier accounting periods or carried forward to offset future profits.
How to Compute Trading Losses?
The computation of trading losses involves offsetting allowable business expenses against trading profit. Losses incurred between 1 April 2020 and 31 March 2022 can be carried back for three years. However, starting from the tax year 2022/23, the original one-year carry-back rule will return.
Claiming Trading Losses in 2023
With the corporation tax set to increase to 25% from 19% in April 2023, businesses may want to claim their relief or deduction allowance now or carry their loss forward to gain a 25% relief. Here are the options:
Current Year Relief: Offset the loss against the total profits of the current year.
Carry-Back Relief: Carry the loss back to offset against profits from the previous 12-month period.
Carry-Forward Relief: Carry the loss forward to future periods.
Group Relief: Offset trading losses against another group member’s profits.
Terminal Loss: Claim relief for losses incurred in the last 12 months of trading.
All businesses, regardless of size and location, can claim relief against their total profits of the same accounting period or the previous 12 months. Even companies that have ceased operations can claim trading loss reliefs through terminal loss relief.
Changes in 2023
The year 2023 marks the return to the original one-year carry-back rule. The temporary three-year extension for claiming loss reliefs, which was a significant help to companies dealing with corporation tax on losses, will no longer be applicable.
How to Claim Loss Relief on a CT600?
Claiming loss relief on a CT600 form involves specific instructions provided by HMRC. Claims below £200,000 may be made outside a return, allowing companies to claim without waiting to submit their company tax return.
A trading loss claim is part of your Company Tax Return. If the claim pertains to the latest accounting period, enter ‘0’ in box 155 on form CT600 and place the full loss amount in box 780. The entire loss, or the claimable portion, should also be entered in box 275 against total profits.
For claims including losses from a later accounting period, you must:
Enter ‘0’ in box 155 on form CT600.
Enter the full amount of trading losses arising in this or later accounting periods that can be claimed against total profits in box 275.
Place the loss amount arising in this accounting period only in box 780.
Carrying Forward a Trading Loss
Unused losses can be offset against future profits. Restrictions apply to carried forward losses from 1 April 2017, including allowances and limitations on the total amount that can be relieved.
Carrying a Trading Loss Back
Losses can be offset against profits for the earlier 12-month period. This is only possible if the same trade was carried on at some point in the accounting period(s) falling within the earlier 12 months.
Examples of Carrying Back Losses
If a loss of £8,000 occurs in the accounting period from 1 January 2016 to 31 December 2016, and profits of £20,000 were made in the earlier 12 months, the loss can be carried back, reducing profits to £12,000.
If an accounting period overlaps the 12-month period, profits are apportioned, and the loss can only be offset against the portion of profit within the 12-month period.
Temporary Extension to Carry Back Trade Losses
The Budget 2021 announced a temporary extension to the carry back of trading losses from one year to three years, for losses up to £2,000,000 for accounting periods ending between 1 April 2020 and 31 March 2022. Losses must be set against profits of the most recent years first.
The current one-year unlimited carry back of trade losses remains unchanged. For the extended relief, the amount of loss that can be carried back to the earlier two years is capped at £2,000,000 for each year.
Extended loss carry back claims must be made in a return. However, claims below £200,000 may be made outside a return, allowing companies with losses providing relief up to £200,000 to claim without waiting to submit their company tax return.
Groups and Trading Losses
If your company or organisation has a qualifying group relationship with another company, you can offset certain losses, including trading losses, against profits of other group
Alongside the three-year loss carry-back extension, anti-avoidance rules were established to prevent group companies from claiming deduction allowance or relief with the purpose of disconnecting from a group. These rules continue to apply and must be considered by businesses in 2023.
How Do You Offset Losses Against Tax?
In the UK, businesses and self-employed individuals may face periods where they incur losses. These losses can be offset against other income or profits, providing a way to reduce tax liability. This process is governed by specific rules and regulations, and understanding how to apply them can be crucial for financial planning.
Types of Losses That Can Be Offset
1. Trading Losses
Trading losses occur when the expenses of a business exceed its income. These losses can be offset in various ways, depending on the circumstances.
2. Capital Losses
Capital losses arise from the disposal of capital assets at a loss. These can be offset against capital gains to reduce the Capital Gains Tax liability.
Methods of Offsetting Losses
1. Against Current Year's Profits
Losses can be set against the profits of the same trade in the current tax year. This can reduce the overall taxable income for the year.
2. Against Previous Year's Profits
If the losses exceed the current year's profits, they can be carried back and set against the profits of the previous tax year.
3. Sideways Loss Relief
This method allows the loss to be set against other income or capital gains. It's known as sideways loss relief and can be applied in specific situations.
Rules and Restrictions
1. Time Limits
There are time limits for claiming loss relief. Generally, the claim must be made within four years from the end of the tax year in which the loss occurred.
2. Restrictions on Capital Losses
Capital losses can only be offset against capital gains, not against other types of income.
3. Restrictions on Sideways Loss Relief
Sideways loss relief has specific restrictions, particularly for individuals who are not actively involved in the trade. The relief may be capped at £25,000 for those who spend less than 10 hours a week on the trade.
How to Claim Loss Relief?
1. Self-Assessment Tax Return
Losses can be claimed through the self-assessment tax return. The relevant sections must be completed, and the necessary calculations made.
2. Separate Claim
In some cases, a separate claim may be required. This can be done by writing to HM Revenue & Customs (HMRC) with the details of the claim.
Strategic Use of Loss Offset
Offsetting losses against tax in the UK is a complex area that requires careful consideration and understanding of the rules. By effectively utilizing the available options, businesses and individuals can optimize their tax position and potentially save significant amounts. Professional advice from a tax specialist or accountant may be beneficial to ensure compliance with the regulations and maximize the benefits of loss offset.
Carrying back losses for corporation tax remains a valuable tool for businesses in 2023. While the temporary three-year extension has ended, the original one-year carry-back rule is reinstated. Understanding the rules, eligibility criteria, and the process of claiming this relief is essential for businesses to maximise their trading losses and reduce their tax liability.
How Can a Tax Accountant Help You Manage the Trade Losses for Corporation Tax?
Corporation Tax in the UK applies to company profits, but when a company incurs a loss, specific rules enable the losses to be carried forward or back against profits, thereby reducing the tax liability. This complex process requires a deep understanding of UK tax law, and that's where a tax accountant's expertise can be invaluable.
Assessing Trade Losses
Trade losses occur when a company's allowable trading expenses exceed its trading income. A tax accountant can:
Identify and Analyse Losses: They evaluate the expenses and incomes, distinguishing between trade losses and other types of losses.
Application of Reliefs: Help apply for reliefs like loss carry back or loss carry forward, depending on the situation and follow the prevailing laws.
Utilising Loss Carry Back
Loss carry back involves offsetting losses against profits from previous accounting periods. A tax accountant can:
Determine Eligibility: Ensure the losses qualify for carry back by adhering to rules.
Calculate the Correct Amount: Determine the correct amount of loss that can be carried back to avoid mistakes.
Submit Necessary Documentation: Prepare and submit all necessary paperwork, such as amended Corporation Tax returns.
Exploiting Loss Carry Forward
If losses cannot be used in the current or previous periods, they can be carried forward. A tax accountant can:
Understand the Limitations: Recognize when and how losses can be carried forward, including restrictions on usage.
Maximize Utilisation: Strategically apply the losses against future profits to minimize future tax liabilities.
Group Relief for Losses
Companies within the same group can also surrender losses to one another. A tax accountant can:
Identify Opportunities: Pinpoint scenarios where group relief may be beneficial.
Ensure Compliance: Confirm that all conditions for group relief are met.
Facilitate the Process: Handle the necessary paperwork and communicate with relevant parties.
Handling Terminal Loss Relief
Terminal loss relief allows businesses to carry back losses from the last 12 months of trading to the previous three years. A tax accountant can:
Identify Terminal Losses: Recognise if losses qualify for terminal loss relief.
Apply the Relief Effectively: Calculate and apply the relief to appropriate accounting periods.
Providing Expertise in Changing Regulations
Tax laws and regulations are subject to changes, and it's crucial to remain compliant. A tax accountant can:
Stay Updated: Keep abreast of changes in tax legislation related to trade losses.
Advise on Impact: Provide insights on how changes affect the business's specific situation.
Implement Changes: Assist in implementing any necessary adjustments to ensure continued compliance.
An Essential Partner in Managing Trade Losses
Managing trade losses for Corporation Tax in the UK is an intricate process that involves multiple considerations, calculations, and compliances. A tax accountant's expertise can guide a business through these complexities, ensuring the most effective and lawful management of losses. By doing so, they help companies minimize their tax liabilities, remain compliant with tax laws, and align their strategies with their broader financial goals. Partnering with a tax accountant is not merely an option; it is a vital strategy for any UK-based corporation aiming to efficiently manage its trade losses.