Carry Back Trading Loss

In August 2024, HMRC updated its official guidance on the Extended Loss Carry Back for Businesses, originally introduced under the Finance Act 2021.

This measure temporarily extended the usual one-year carry-back period to three years for both companies and unincorporated businesses (such as sole traders and partnerships) to help businesses recover from pandemic-related trading losses.

Although the final date to submit extended carry back claims was 31 March 2024, the guidance remains an essential reference point for understanding how loss carry back operates — and how future relief extensions could apply if reintroduced.

The principles remain highly relevant for businesses facing current or future losses, as standard one-year carry-back rules continue to apply.

What Is a Carry Back Trading Loss?

A carry back trading loss allows you to use current-year trading losses to reclaim tax paid on profits from earlier years.

Instead of carrying a loss forward to offset future profits, you can “carry it back” to earlier accounting periods — generating an immediate tax refund from HMRC.

This can be a vital cash-flow lifeline for businesses that have faced challenging trading conditions or unexpected downturns.

How the Standard Carry Back Rule Works

Under normal rules:

• Companies can carry trading losses back one year to offset profits from the same trade.

• Unincorporated businesses (sole traders, partnerships, and professionals) can carry losses back one year against total income.

If the business ceases trading, terminal loss relief may allow losses from the final trading period to be carried back three years without limit.

For most businesses, the one-year carry back remains the default option — but the 2021 temporary extension offered a longer window and extra flexibility.

The Extended Loss Carry Back (Finance Act 2021)

The Finance Act 2021 temporarily enhanced loss relief to help pandemic-affected businesses reclaim tax faster. The scheme covered:

• Accounting periods ending between 1 April 2020 and 31 March 2022 for companies, and

• Tax years 2020/21 and 2021/22 for unincorporated businesses.

Under this extended rule:

• Trading losses could be carried back up to three years.

• Losses had to be used against the most recent profits first, before offsetting earlier years.

• Claims for the second and third earlier years were capped at £2 million per year, per business or group.

Although this temporary extension has ended, it illustrates how HMRC applies carry back relief during extraordinary economic conditions — and similar measures could return if future economic support packages are introduced.

Summary of Current HMRC Rules (Post-2024 Update)

The August 2024 HMRC update clarified the following:

• The one-year carry-back rule remains the standard mechanism.

• The three-year extended relief ended on 31 March 2024 — but businesses that made claims before that date remain eligible for refunds.

• De minimis claims (up to £200,000) could be made outside a tax return, allowing faster processing.

• For larger claims (over £200,000), businesses had to submit via the company tax return.

• Group companies were subject to a £2 million group cap for each financial year covered by the extension.

While these temporary measures have expired, HMRC retained the core framework for one-year carry-back claims and standard restrictions under the Corporation Tax Act 2010.

Who Can Claim a Carry Back Trading Loss?

Limited Companies

A company can:

• Offset a trading loss against total profits from the same accounting period.

• Carry unused losses back one year to reclaim Corporation Tax.

• If the company ceases trading, it can claim terminal loss relief, allowing losses from the final period to offset profits from the previous three years.

Sole Traders and Partnerships

Individuals and partnerships can:

• Carry back trading losses to the previous tax year against total income.

• In some cases, extend this to three years (for early-year losses or under temporary reliefs).

For both business types, the losses must relate to the same trade and be supported by accurate accounting records.

How to Make a Claim

For Companies

1. Calculate your trading loss accurately for the relevant accounting period.

2. Decide the amount to carry back — you can carry all or part of the loss.

3. Submit your claim within your Corporation Tax return, or write to HMRC if claiming under de minimis rules.

4. Include computations and details of the profits being offset.

5. HMRC will process the claim and issue a Corporation Tax refund where appropriate.

For Unincorporated Businesses

1. Include the trading loss in your Self Assessment tax return.

2. Tick the relevant section indicating that the loss is being carried back.

3. HMRC will adjust your previous year’s tax calculation and issue a refund for overpaid tax.

Time Limits

Claims must generally be made within 12 months of the filing deadline for the loss-making period. Late claims are not normally accepted.

Extended Loss Carry Back: Caps and Group Limits

The HMRC guidance confirms:

• Losses carried back to the first earlier year (CY-1) were uncapped.

• Losses carried back to the second and third years (CY-2 and CY-3) were capped at £2 million per accounting period.

• For group companies, a group-wide cap of £2 million applied per relevant year.

• The cap was not pro-rated for shorter accounting periods — meaning a company with a six-month accounting period could still claim the full £2 million limit.

This structure balanced flexibility with fiscal control and ensured larger corporate groups could not claim disproportionate refunds.

Example: How Carry Back Relief Works

Example — Limited Company

A company made the following results:

• Profit of £250,000 in 2021/22 (tax paid at 19%)

• Profit of £300,000 in 2022/23

• Loss of £400,000 in 2023/24

Under standard rules, the 2023/24 loss can be:

• Carried back one year to offset the £300,000 profit in 2022/23, generating an immediate refund, and

• The remaining £100,000 carried forward to offset future profits.

If an extended carry back were reintroduced (as in 2021), the business could carry losses back a further two years, up to the relevant cap, maximising cash recovery.

Key Planning Considerations

1. Compare tax rates — if Corporation Tax rates are expected to rise, carrying losses forward may be more valuable than carrying them back.

2. Optimise group claims — ensure group companies allocate losses efficiently to stay within the £2 million cap.

3. Maintain accurate records — claims must be supported by detailed accounts, computations, and proof of prior profits.

4. Plan your year-end strategically — adjusting your accounting period can influence the timing and value of relief.

5. Seek advice early — deadlines and complex caps mean professional guidance can make the difference between a smooth refund and a delayed or rejected claim.

Why Professional Advice Is Essential

The rules for loss carry back — especially when combined with other reliefs like terminal loss or group relief — are complex. Errors in timing, calculations, or documentation can delay refunds and risk HMRC queries.

A professional tax accountant can help you:

• Review eligibility under current or extended rules.

• Prepare accurate loss computations.

• Submit timely and compliant claims to HMRC.

• Assess whether to carry back or carry forward for maximum tax efficiency.

• Ensure alignment with group relief and cap restrictions.

At Tax Accountant UK, we handle the full process — from reviewing your accounts to preparing loss carry back claims and securing refunds efficiently.

Final Thoughts: Turning Losses into Cash Flow

Even though the extended carry back relief ended in March 2024, the standard one-year rule remains a valuable opportunity for businesses to reclaim tax from HMRC.

For companies and self-employed individuals facing tough trading periods, a carry back claim can transform accounting losses into immediate cash flow support.

Understanding how these rules apply — and preparing for potential future extensions — helps ensure your business makes the most of every available relief.