How to Claim Trading Loss Relief in Corporation Tax

The UK tax system allows businesses to lower their corporation tax payments by claiming loss reliefs. To help those affected by the economic consequences of the coronavirus pandemic, the government announced an extension to the period that businesses can reclaim tax reliefs on trading losses incurred between the 2020 and 2022 tax years, extending the carryback period to three years.

What Are Trading Losses?

Trading losses occur when a company's income is less than its allowable expenses. These losses can be claimed back as tax relief and can be offset against allowable expenses. The temporary three-year extension of loss relief, introduced in April 2020, increases the limit of allowable losses to £2 million, while the original one-year carryback rule will come into effect in the 2022/23 tax year.

Here are your options when claiming loss relief:

• Current Year Relief

By claiming current-year relief, businesses can reduce their total profits by the number of their allowable losses. This will reduce the amount of corporation tax that needs to be paid. For example, if a business's total profits are £30,500 and its allowable losses are £15,000, its total corporation tax due will be reduced to £15,500.

• Carryback Relief

There is a three-year extension for loss relief for companies that have incurred losses over the accounting period or the last 12 months. This allows these losses to be set against profits from the previous 12 months rather than just the accounting year. 

• Carry-Forward Relief

Carry-forward relief is a beneficial option for companies in certain situations, such as when customers will pay for their services in a future accounting period. Additionally, if their profits are between £50,000 and £250,000, they will be subject to an increased corporation tax rate in April 2023. To avoid this, they can use carry-forward relief to get 25 per cent relief on their losses.

• Group Relief

Companies with a close relationship with another company may use carryback or carry-forward loss reliefs. These methods allow the company making a loss to take that loss and offset it against the profits of another company in the same group. The government does not consider these companies to be one for tax purposes but still allows for losses to be transferred between them. The company transferring the loss is the surrendering company, and the company claiming the loss is the claimant company.

• Terminal Loss

Businesses that have suffered losses from trading activities in the past year and are now forced to end operations can take advantage of terminal loss relief to recover some of the losses. This relief allows them to roll back the losses against the total profits of the last three years.

• Anti-Avoidance Rules

The three-year loss carryback extension allows companies to use losses from the 2020/2021 tax year to get a tax refund from the previous two years. Anti-avoidance rules are also implemented to stop companies from taking advantage of this rule to avoid paying taxes. 

Conclusion

Claiming trading loss relief in corporation tax can be incredibly beneficial and straightforward. Not only can you save money on your taxable profits, but you can receive compensation for any losses you have incurred. Taking advantage of this relief scheme can be invaluable in helping you reduce your tax bill and optimise your profits. So, why not take the time to explore the various options available and make sure you get the most out of this relief scheme?

1 to 1 Accountants is an accountancy firm based in the UK, serving small businesses, limited companies, partnerships, sole traders, eCommerce companies, freelancers, landlords and tradespeople. If you need help with your capital gains tax, we’ve got you covered. Get in touch with us today and let us know how we can help!

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