Claiming tax back on past losses

Finance
Written by Stuart Long is a solicitor with Howard Kennedy
Wednesday, 10 June 2009
The Government has announced a new tax relief in this year’s Budget with the aim of assisting with improving the cash flow of SMEs at a time when cash is king. Here, in the form of some FAQs, we take a look at the new scheme: Related Articles: Shifting the loss Pre-Budget report tax breakdown The latest tax tips Tax year end tips Time to claim R&D tax relief and credits So what is this new “carry back” tax relief? The Government’s aim is for struggling businesses (including companies) to be given tax relief which may amount to millions of pounds a year through the extension of a temporary scheme, first proposed in last year’s pre-Budget Report, allowing them to claim back tax paid on a previous year’s profits. The Treasury has indicated that this “carry back” scheme may help an estimated 140,000 businesses, which may each claim an average of £4,000 each in tax rebates. When will the new relief be introduced? The relief was announced in the pre-Budget Report last year and, in this year’s Budget, there was a proposal to extend it by a year until November 2010. This extension is welcome: for example, those companies with a year end corresponding with the end of the calendar year, and which face a loss making 2009, should now be able to benefit potentially from the carry back scheme for their accounting period ended 31st December 2009. Last week, legislation was introduced in clause 23 and schedule 6 to this year’s Finance Bill. The measure will have effect on or after 22nd April 2009 for company accounting periods ended in the period 24th November 2008 to 23rd November 2010, and for tax years 2008-09 and 2009-10 for unincorporated businesses. So how does the new relief work? Broadly, in addition to the amount of unlimited losses which may be carried back to the previous year, the “carry back” scheme allows businesses to reclaim tax on profits made in the past three years by carrying back unused trading losses of up to £50,000 to the earlier two years. This £50,000 limit applies separately to the unused losses of each 12 month period or tax year within the duration of the extension. I understand the basic concept now, so how does the new relief fit-in with existing loss reliefs? Under existing rules, businesses have a number of mechanisms to assist with tax being repaid from profitable years through set-off against losses which arise in subsequent periods. Very broadly, businesses which make trading losses in an accounting period may make the following claims: For that loss to be set-off against profits/general income of the same accounting period. Additionally, the business may claim for the unused balance of such losses to be set-off against all profits/general income of the preceding 12 month period (provided that the business was carrying on the trade in the accounting period or periods which fall within that 12 month period). Start-up unincorporated businesses in early years of operation may also carry back trading losses fro three years. Alternatively, a trading loss may be set-off against trading income from the same trade in subsequent accounting periods, indefinitely. Businesses which cease to trade additionally have access to terminal loss relief, including carry-back for three years. The new tax relief extends the carry-back of trading losses from 1 year to 3 years, with losses being carried back against later years first. The amount of trading losses that can be carried back to the preceding year remains unlimited. After carry back to the preceding year, a maximum of £50,000 of unused losses will be available for carry back to the earlier two years. This £50,000 limit applies separately to the unused losses of each 12 month period or tax year within the duration of the extension. For companies, this means a cap of £50,000 on the extended carry back of losses incurred in accounting periods ending in the 12 months to 23 November 2009 and a separate £50,000 cap on the extended carry-back of losses incurred in accounting periods ending in the 12 months to 23 November 2010. For unincorporated businesses, a separate £50,000 cap will apply to the extended carry-back of losses made in each of the tax years 2008-09 and 2009-10. OK – so how does the new relief help with the cash flow of the business? By extending the carry back of relief provisions, and allowing set-off of “excess” trading losses (which ordinarily would have to be carried forward) against earlier profitable years, accelerated tax rebates are paid to a business, which improves cash flow at this critical time in the business cycle when cash is king. How does my business get the new relief? Small companies should apply through the Government’s Payment Support Service to receive rebates paid in profitable years. So what is this new “carry back” tax relief? The Government’s aim is for struggling businesses (including companies) to be given tax relief which may amount to millions of pounds a year through the extension of a temporary scheme, first proposed in last year’s pre-Budget Report, allowing them to claim back tax paid on a previous year’s profits. The Treasury has indicated that this “carry back” scheme may help an estimated 140,000 businesses, which may each claim an average of £4,000 each in tax rebates. When will the new relief be introduced? The relief was announced in the pre-Budget Report last year and, in this year’s Budget, there was a proposal to extend it by a year until November 2010. This extension is welcome: for example, those companies with a year end corresponding with the end of the calendar year, and which face a loss making 2009, should now be able to benefit potentially from the carry back scheme for their accounting period ended 31st December 2009. Last week, legislation was introduced in clause 23 and schedule 6 to this year’s Finance Bill. The measure will have effect on or after 22nd April 2009 for company accounting periods ended in the period 24th November 2008 to 23rd November 2010, and for tax years 2008-09 and 2009-10 for unincorporated businesses. So how does the new relief work? Broadly, in addition to the amount of unlimited losses which may be carried back to the previous year, the “carry back” scheme allows businesses to reclaim tax on profits made in the past three years by carrying back unused trading losses of up to £50,000 to the earlier two years. This £50,000 limit applies separately to the unused losses of each 12 month period or tax year within the duration of the extension. I understand the basic concept now, so how does the new relief fit-in with existing loss reliefs? Under existing rules, businesses have a number of mechanisms to assist with tax being repaid from profitable years through set-off against losses which arise in subsequent periods. Very broadly, businesses which make trading losses in an accounting period may make the following claims: For that loss to be set-off against profits/general income of the same accounting period. Additionally, the business may claim for the unused balance of such losses to be set-off against all profits/general income of the preceding 12 month period (provided that the business was carrying on the trade in the accounting period or periods which fall within that 12 month period). Start-up unincorporated businesses in early years of operation may also carry back trading losses fro three years. Alternatively, a trading loss may be set-off against trading income from the same trade in subsequent accounting periods, indefinitely. Businesses which cease to trade additionally have access to terminal loss relief, including carry-back for three years. The new tax relief extends the carry-back of trading losses from 1 year to 3 years, with losses being carried back against later years first. The amount of trading losses that can be carried back to the preceding year remains unlimited. After carry back to the preceding year, a maximum of £50,000 of unused losses will be available for carry back to the earlier two years. This £50,000 limit applies separately to the unused losses of each 12 month period or tax year within the duration of the extension. For companies, this means a cap of £50,000 on the extended carry back of losses incurred in accounting periods ending in the 12 months to 23 November 2009 and a separate £50,000 cap on the extended carry-back of losses incurred in accounting periods ending in the 12 months to 23 November 2010. For unincorporated businesses, a separate £50,000 cap will apply to the extended carry-back of losses made in each of the tax years 2008-09 and 2009-10. OK – so how does the new relief help with the cash flow of the business? By extending the carry back of relief provisions, and allowing set-off of “excess” trading losses (which ordinarily would have to be carried forward) against earlier profitable years, accelerated tax rebates are paid to a business, which improves cash flow at this critical time in the business cycle when cash is king. How does my business get the new relief? Small companies should apply through the Government’s Payment Support Service to receive rebates paid in profitable years. Stuart Long is a solicitor with Howard Kennedy Share this: digg del.ico.us Newsvine Reddit Furl technorati Facebook Comments (0) Subscribe to this comment's feed Post a comment Name (required) Email (required) (not published) Website Title By posting on this website you are agreeing to abide by our website comment policy and all posts are subject to the approval of the website editor. 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