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Trading loss relief: quantifying impact of COVID-19 is vital

19 March 2020: business must keep track of losses resulting from coronavirus to ensure they can claim maximum reliefs and survive the pandemic, says ICAEW.

As the world faces an extraordinary health and economic crisis businesses may lose control over their day-to-day compliance and accounting processes, warns ICAEW’s Tax Faculty.

The faculty is urging firms to keep track of any losses accumulated as a result of COVID-19 and to take action to find out what reliefs are available to them (see list below).

‘Using reliefs effectively will be crucial for struggling businesses,’ says Anita Monteith, Policy Lead. ‘Mitigating tax payable by using losses wisely could provide invaluable help to those with cash-flow difficulties.’

Reaction to 2008 crisis - any lessons?

During the 2008 financial crisis the Exchequer made extensions to existing reliefs, including allowing an extended three-year carry back for trading losses outside of a cessation of trade.

Similarly, HMRC accepted what were called ‘provisional’ loss carry-back claims. This occurred in circumstances where businesses could demonstrate that sufficient current year trading losses would be made to carry back to profits of an earlier year, prior to submitting a tax return.

This practice accelerated tax repayments relating to losses of the current year. Companies were often required to provide draft accounts and tax computations to substantiate provisional loss figures which required a continued focus on compliance despite a challenging environment.

Current crisis

While the Chancellor has not indicated these measures will be in place in the current crisis, it will be crucial for businesses to be able to quantify the losses arising to adapt and take advantage of reliefs as they arise.

The Tax Faculty is recommending that HMRC should adopt a similar practice to provisional loss claims and that reliefs will be extended as much as possible.

Reliefs available

Here is a high-level summary of the key trading loss reliefs available for businesses, some of which will result in tax refunds. Affected entities should take advice to consider how the rules might apply to them in more detail.

Unincorporated businesses

Continuing trades

In a 'continuing trade' (ie a trade that is not in the first four years or last 12 months of trading), a loss may be set off against current year income, be carried back or carried forward as follows:

Current year / carry back “sideways loss relief”

Trading losses of the current year can be offset against other income of the current year and/or prior year in any order. Currently, this is capped at the higher of £50,000 and 25% of total income.

This relief can be extended against capital gains in certain circumstances.

Carry forward

Trading losses can be carried forward against future profits of the same trade. This is unlikely to be as attractive because it does not create an immediate cash repayment, but nonetheless will reduce future tax payable.

Losses in early years or closing of trade

Early years loss relief

Relief is available for a loss incurred in the first four years of trading. The loss is deducted from the individual's net income for the three years before the one in which the loss is made, taking income of an earlier year before that of a later year. This is subject to the same cap as sideways loss relief (£50,000, 25% of total income). This can generate a cash repayment of tax paid perhaps while the business owner was an employee before starting up their new business.

Terminal loss relief

Where a trade ceases, losses of the final 12 months can be carried back three years. Relief is provided as far back as possible, starting with the later year first.

More details are available in HMRC’s worksheet HS227 Losses (2019).

Loss relief for companies

Much of the same reliefs apply to corporate entities with some subtle differences.

Current year and prior year relief for trading losses

Generally, if a company incurs a trading loss in any accounting period it may claim to firstly offset that loss against its total corporation tax profits of that accounting period and any balance remaining can be set off against total profits of earlier accounting periods during which it was carrying on the same trade. Restrictions on the use of losses can apply to companies with losses in excess of £5m from 1 April 2017.

Terminal loss relief

Two types of terminal loss relief are available to corporates. The first operates in the same way as described for unincorporated traders above - losses of the final 12 months can be carried back three years, starting with the later year first.

Where trading losses have been carried forward to the period of cessation but not relieved, the losses can be set against profits of the three years to the end of the period of cessation ie, if a trade ceases in the period to 31 December 2020, relief is available against the profits of the three years from 1 January 2018 to 31 December 2020. (This is different to relief for losses of the last 12 months where carry back is to the preceding 36 months). This relief only applies from 1 April 2017 so some restrictions apply.