We outlined the new provisions that allow income tax trading losses to be carried back up to three years (instead of just one), on 11 March 2021. This law has now been enacted in FA 2021, Sch 2 and HMRC has updated its guidance on how to claim those losses.
Only trading losses can be carried back up to three years, and they must arise from a commercial trade which was carried on with a view to a profit. Farmers and market gardeners must not have made a loss before capital allowances in any of the preceding five tax years.
The loss must be set against trading profits in the preceding three years, using profits of the most recent years first. One claim can cover all three years.
Before opting for the three-year loss carry back, check whether a claim under ITA 2007 s 64 to set the loss against the taxpayer’s other income of the same or previous year would be more appropriate. Note the s 64 claim may waste personal and saving allowances.
Carrying back the loss does not actually reduce the tax payable for the earlier years, but instead creates a stand-alone tax credit, which is reflected in the calculation of tax for the later year when the loss arose.
This means the re-calculation of the tax liability in the earlier years is purely notional, carried out to find the difference between the tax as per the tax return filed and the new notional tax liability based on the loss carry-back claim. The tax return figures for those earlier years are not altered at all. Any interest charges raised on late paid tax in 2018/19 and 2019/20 are unaffected by the loss carry back claim as the tax due for those years has not been amended.
The class 4 NIC due for the earlier years is not refunded, but the loss is carried forward for the purpose of class 4 NIC only. This NIC relief is claimed in box 102 of the SA tax return.
Written by the Tax Advice Network