Has Covid Caused Your Business to go from Profit into Loss Making?

You may be able to save up to £760,000 of tax

Many companies have been severely affected by Covid and previously profitable businesses have struggled to survive, with many making losses. But there is a tax ‘silver lining’: these losses may now be used to generate a refund of tax paid in previous years.  Here’s how it works.

Companies which make trading losses are normally entitled to carry those losses back to the previous tax year, provided they have first used up those losses against any profits of the current year. This can generate a repayment of tax from HMRC.

Worth changing year-end?

The government announced a temporary extension to these rules in the 2021 Budget. This applies to trading losses made in accounting periods ending between 1 April 2020 and 31 March 2022.  As such, companies may wish to consider changing their year-end, where it currently falls after 31 March 2022, if this would mean losses could be utilised and a repayment of tax claimed.

This change will benefit companies which were previously profitable but which have been affected by the Covid-19 pandemic and therefore may now be loss making. A significant cash flow advantage could be gained by using this new rule and obtaining a refund of tax previously paid.

What is the maximum that could be saved?

Losses are carried back against later years first. 

An unlimited amount of losses can be carried back one year, but there is a maximum of £2m which can be carried back more than one year, for each period in which a loss is made. This means that businesses with large losses could save up to £760,000 under these new rules, where they carry back the maximum £2m to earlier accounting periods.

This is calculated as follows:

£2,000,000 * 19% tax rate = £380,000

£380,000 x 2 years = £760,000

HMRC have also confirmed that they will be able to consider claims for loss carry back, before the company tax return is filed in ‘exceptional circumstances’. This means that a loss carry back and repayment of tax paid in earlier years may be made before the annual accounts and tax return preparation work is done, providing a cash flow advantage.

‘Exceptional circumstances’ is likely to be interpreted as a situation where a company’s losses are so large that they will comfortably exceed other income in the year. HMRC will review on a case by case basis and evidence including management accounts will be required.

We can help

Dixcart can help you to work out how much you may be able to reclaim, and can advise on whether it would be worthwhile changing your company year-end to make the most of the new rules.

For more information please contact your usual Dixcart adviser or email hello@dixcartuk.com.

The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute accounting, legal or tax advice. Professional advice should be obtained before taking or refraining from any action as a result of the contents of this document.