Trading Losses – Carry back or carry forward?

In the March 2021 Budget, it was announced that the normal one year carry back for trading losses would be extended to three years. That means that many businesses that have made losses during the COVID-19 pandemic may be able to obtain a repayment of tax paid in that earlier three-year period. This enhanced carry back applies to unincorporated businesses as well as limited companies and will provide a much-needed tax refund.

However, with the corporation tax rate increasing to 25% from 1 April 2023 for profits over £250,000 it may be more beneficial to carry the loss forward. Note that the marginal rate is 26.5% where profits are between £50,000 and £250,000 a year. So, there is a trade-off between a tax refund now and a possible bigger tax saving in the future.

For the enhanced carry back the company’s the loss-making accounting period must end between 1 April 2020 and 31 March 2022. For unincorporated businesses the trading loss must be incurred in 2020/21 or 2021/22.

For corporation tax purposes, it is no longer necessary to finalise the company accounts and file the CT600 corporation tax return to claim loss relief where the loss is no more than £200,000. HMRC will however require evidence of the loss to process the claim such as management accounts for the period.

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