The UK Government proposed a temporary extension of the laws governing trade loss relief for both individuals and businesses in its March 2021 Budget.
This creates a new loss relief option, offset trade loss for 2020-21 against trade profits for 2019/20, 2018/19, and 2017/18, subject to a £2 million limit.
With many companies suffering due to COVID-19, now is an excellent time to take advantage of the opportunity and maximise the loss claims.
The new regulations would enable businesses with accounting periods ending between 1 April 2020 and 31 March 2022 to hold back trading losses over a prolonged duration of three years, beginning with the most recent year’s earnings. For single sellers, trade losses from the tax years 2020/21 and 2021/22 can be carried over and offset against earnings from the same trade for three years preceding the tax year of the loss.
The new extension would draw on the current trade loss deduction from gross profits. All other existing loss relief provisions will stay in effect.
Due to the lack of enactment, HMRC cannot give effect to lose claims and, as a result, no repayments under the expanded loss carryback will be rendered before the Finance Bill 2021 receives Royal Assent. This is scheduled to occur before Parliament’s summer break in July.
While we cannot process the claims now, we will surely check into the solutions open to you and assist you in planning.
Tips for self-employed people and partners on planning
There are several contingency considerations when using losses. Our Tax Accountants often attempts to offset your loss against taxes subject to a higher marginal tax rate to maximise your return. We attempt to offset your loss against taxes levied at 45 per cent, then 40 per cent, and eventually 20 per cent.
If we compare your loss to other sources of revenue, such as dividend income, we will look to save tax at the maximum marginal rate possible. Along with maximising the income tax return, we will seek to maximise the Class 4 national insurance refund, if applicable.
Additionally, we will consider personal allowances. Where your allowance still protects your salary, there is no use in claiming a loss against it, and this would not result in tax savings. In some cases, we will be able to reinstate the personal allowance if missed due to a prior year’s higher salary.
Finally, timing is critical. We do not know what the future holds to be higher taxes or higher earnings. Planning about tax and when to reinvest losses is critical.
Business planning tips
Keep in mind that income tax rates are scheduled to increase from 19% to 25% in April 2023. The UK Government would implement a new 19 per cent Small Income Rate on businesses reporting total profits of fewer than £50,000. Income worth up to £250,000 would be taxed at the standard rate of 25%, reduced by a marginal relief provision that gradually increases the overall Corporation Tax rate.
Thus, businesses who may be subject to the new 25% threshold and are eligible to utilise the expanded loss carryback option may weigh the relative advantages of claiming a tax return now at 19 per cent over bringing forward expenses into years where they may qualify for relief at the new 25% rate.
This is dependent on circumstances since you can want to claim a refund now and alleviate the existing cash flow condition rather than wait.
The year-end date chosen by a business will often have a major impact on the scale of the subsequent corporate tax bill, based on whether revenues are declining or increasing. Additionally, we will assist you with tax preparation and inform you about updated guidance.
We will assist you.
If you are a self-employed, partnership or a limited company, there are many tax benefits associated with claiming losses. The challenge is in comprehending these rules and determining what is best for you and your company. We will assist you in comparing the choices, determining the tax incentives, and completing all necessary paperwork.