Many businesses have suffered losses as a result of the Covid-19 pandemic, and where a business has made a loss, various options are available to obtain relief for that loss. The challenge is to make the best use of the loss.
To help loss-making businesses, legislation is to be introduced to increase temporarily the period for which a business can carry back a loss from one year to three years.
The extended carry back is available to both unincorporated business and companies and can be used to generate a useful tax repayment at a time when cash flow is tight.
Under the existing rules, a person who incurs a trading loss in a tax year can make a claim to offset the loss of their net income of the current year, the previous year or both years. This option is now available to traders using the cash basis.
For a limited period, the carry-back period will be extended, and losses can be carried back and set against trading profits of the previous three years from one.
Losses carried back must be set against the income of a later year before an earlier year. The extended carry back will apply to losses in 2020/21 and 2021/22. It will enable a loss for 2021/22 to be carried back where a loss was also made in 2020/21 and the individual had no other income for that year.
The extended carry back also applies for corporation tax purposes for losses incurred in accounting periods ending between 1 April 2020 and 31 March 2021 and losses incurred in accounting periods ending between 1 April 2021 and 31 March 2022.
For corporation tax purposes, losses can be carried back to the preceding accounting period.
Where the extended carry back applies, a loss can be carried back and set against profits of the same trade for the preceding year and two previous years, with losses being set against a later year before an earlier year.
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