As part of a range of measures to support businesses post-covid, the extended loss carry back rules provide a temporary tax break for businesses.
Finance Act 2021 detailed new rules around taxation for companies providing for a temporary extension to the loss carry back legislation for trading losses for both incorporated and unincorporated businesses.
The new legislation means those eligible can save money on taxation - which is as important as ever as businesses navigate the post-covid landscape.
But what has changed under the new rules, and what has stayed the same? Read on for a full breakdown of the new legislation to find out what it means for you and your clients.
Company taxation – three-year extension
The present ruling means that company trading losses that have been accrued can be carried back one year without restriction. For accounting periods ending between 1 April 2020 and 31 March 2022, there is a three-year extension. Losses against profits from the most recent years must be set against, before carrying back to previous years.
£2m cap on one-year extended relief
For the current one-year extended relief, the amount of loss that can be carried back is capped at £2m for each of the earlier two years. Groups also have a group cap of £2m for each relevant period.
De minimis limit
In most instances, an extended loss carry back claim should be made on a company tax return. But there is no need to wait until the submission of a claims return below a de minimis limit of £200,000. This applies to any stand-alone or group company.
However, if the claim exceeds the de minimis limit of £200,000, then it must be made on a company tax return.
Commencement and duration
The change can be applied to losses suffered in accounting periods ending between 1 April 2020 and 31 March 2022.
There are no alterations to the existing legislation that allow a trade loss for a tax year to be set against general income of the loss-making year and/or the previous year. Similar caps, as mentioned above, will also be in place for unincorporated businesses.
The three-year extension will add to the current trade loss relief against general income in section 64 of ITA 2007. It will apply where a claim has been made under section 64 of ITA 2007 to set a trade loss for 2020-21 or 2021-22 against general income of the current and/or previous year, and relief for the loss cannot be fully given under that claim. All other current loss reliefs will remain available.
The change is temporary and is only applicable to trade losses for tax year 2020-21 and 2021-22. Trade losses in 2022-23 will be subject to the regular one-year carry back rule.
Making a claim: companies
For companies wanting to claim under the new rules, it can be done via the corporation tax return (by completing box 45). Claims to the extended loss relief must be made within two years of the end of the accounting period in which the loss being carried back arises.
Submission of amended corporation tax returns will not be permitted for the extended loss carry back claims. This is because in most cases the time limit for amendments will have lapsed.
Making a claim: unincorporated businesses
Loss relief claims will normally be made in a person’s tax return. However, this is not required when a claim is made for more than one year. Stand-alone claims can be made as soon as the period in which the loss was made has passed.
The loss itself must also be calculated before the claim is submitted, and the claim must specify the name of the business, the period in which the loss was made, the amount of the loss, and how the loss is to be used.
Due to the time limits against claims, it is vital that any claims are made as soon as possible. These are the deadlines for claims:
Making a claim: de minimis
Any business or individual wanting to make a de minimis claim will need to supply the below details directly to HMRC:
Any amendments to a de minimis claim would need to be made in writing, within 30 days of the original claim submission.
To find out how we can help you:
In a statement to MPs today, new financial secretary to the Treasury Lucy Frazer has confirmed that the introduction of Making Tax Digital (MTD) for income tax will be postponed by a year.
The quarterly digital reporting for landlords and the self employed was due to start in 2023, but it will be pushed back by 12 months, the second delay to the digitisation programme.
‘The government recognises the challenges faced by many UK businesses and their representatives as the country emerges from the pandemic over the last year. In recognition of this and of stakeholder feedback, we will now be introducing MTD for ITSA a year later, in the tax year beginning in April 2024,’ said Frazer in a written statement.
‘General partnerships will not be required to join MTD for ITSA until the tax year beginning in April 2025.
‘The date at which all other types of partnerships will be required to join will be confirmed later.’
This delay will also affect the introduction of the new penalty scheme for late filing and late payment of tax for ITSA. This will now be introduced for those who are mandated for MTD for ITSA in the tax year beginning April 2024, and for all other income tax self-assessment customers from April 2025.
Alongside the regulations - statutory instrument - laid in parliament today, HMRC has also published a tax information and impact note (TIIN) setting out the projected benefit and cost impacts of MTD for ITSA, as well as a policy paper to help different businesses understand what their transition to MTD could look like in more detail.
‘A later start for MTD for ITSA provides more time for those required to join to make the necessary preparations and for HMRC to deliver the most robust service possible, affording additional time for testing in the pilot,’ Frazer said.
‘HMRC will continue to work in close partnership with business and accountancy representative bodies and software developers to ensure taxpayers are well supported as they adopt MTD for ITSA.’
Nimesh Shah, CEO of Blick Rothenberg said: ‘HMRC are buying themselves some time by not introducing MTD for income tax, especially with the new social care levy and the backlog from covid. There’s also the recent consultation on moving the tax year, and aligning the basis period, and various proposals from OTS.
‘This give HMRC some time to deal with the IT infrastructure which is notoriously difficult and to do proper testing of the systems. Government IT projects are fraught with problems and the extension would give HMRC a better chance of ensuring that everything works smoothly.
‘It might even be possible for them to align the MTD changes with the basis period, to bring the tax year in line for all businesses. We’ll have to wait and see what else the government says.’
HMRC estimates a transitional cost for MTD adoption by businesses of around £1.3bn and a net increase in the ongoing costs of tax compliance of around £152m for those businesses mandated to use MTD for ITSA. This equates to an average transitional cost of £330 per business and an annual cost of £35 per business within scope.
This delay has also had a knock-on effect on the plans to introduce basis period reporting for the self employed and partnerships, which is currently out for consultation and has come in for some criticism due to the rushed nature of the original time scale, particularly as businesses were recovering from the pandemic.
‘The government has also recently consulted on a reform of the complex basis period rules that govern how self-employed profits are allocated to tax years,’ Frazer said. ‘Many respondents said that the reform was a sensible simplification but asked for more time to implement the changes.
‘In recognition of these concerns, these changes will not come into effect before April 2024, with a transition year not coming into effect earlier than 2023. The government will respond to the consultation in due course providing the next steps.’
The move was welcomed by the Chartered Institute of Taxation (CIOT) as there was a general view that there had been little time for full testing of the rollout or a communications effort to educate taxpayers about the upcoming changes.
Richard Wild, head of tax technical at the CIOT, said: ‘We are pleased that the government has listened to feedback from stakeholders such as ourselves and today announced a deferral of the start date for MTD for Income Tax Self Assessment so that it will now commence from April 2024 (and April 2025 for general partnerships).
‘There is still much to be done to ensure that MTD delivers its purported benefits without adding significant costs and burdens for businesses and their advisers. We would urge HMRC to prepare and publish a detailed implementation roadmap to ensure there is adequate time for software development, testing and communication before April 2024.’
Frazer took over from Mel Stride who lost his Treasury job in last week's reshuffle and had been instrumental in pushing through the government's ambitious tax digitalisation programme.
To find out how we can help you:
The Office of Tax Simplification (OTS) has published analysis of the potential benefits, costs and implications of a change to the tax year.
The OTS review sets out its analysis of the benefits, costs, and wider implications of a change to the date of the end of the tax year for individuals.
There are concerns about the cost implications of any change to the current 5 April year end date.
The costs of change are significant, both in terms of the financial cost and the opportunity cost, the OTS said. Whether moving to 31 March or 31 December, the work involved would consume government and private sector resources and make it much harder to implement other changes at the same time. A move to 31 December could also require changing the UK’s financial year.
The review considers the high-level implications of moving the tax year end date to 31 December, and a more detailed evaluation of the implications of a move to 31 March. It also considers potential short-term practical measures to facilitate the launch of Making Tax Digital for Income Tax.
If the government were to opt for a 31 December year end there would be significant impacts from the change. The OTS said: ‘It is because a three-month change, involving a transitional tax ‘year’ of just under nine months, would require transitional provisions to address the impact on the Exchequer and taxpayers, which could prove costly or complex. From the following year, the self-assessment deadline would move to 31 October, with comparable changes to other reporting and payment deadlines, with particular consequences for taxpayer, agent and HMRC workloads in that transitional period.’
Some changes to reporting measures are currently out for consultation as part of HMRC’s review of the basis period, which considers the option to treat 31 March and 5 April accounting dates as equivalent in relation to profits from self-employment.
Bill Dodwell, OTS tax director said: ‘It’s been stimulating to explore this issue, which has been of long-standing interest to many given the curiosity aroused by the UK’s use of a tax year running from 6 April to 5 April.
‘Despite our having carried out our review over a short period, many people have got in touch to share their insights and experience. A clear majority of those responding to us thought that the UK should adopt a different year end – but there was a range of views on whether to move to 31 December or to 31 March.
‘This report presents information and analysis to inform evaluation and debate about the implications of any potential change and its timing. It does not aim to make a specific recommendation about whether the tax year should change.’
‘There would be clear advantages from having a different tax year end date, but as the transitional costs and impacts are significant, it would require detailed advance planning. If government were to make a change, it would also be important to ensure the timing did not derail existing change programmes such as work on the Single Customer Account.
‘So, while we do not consider such a change should take place in the immediate future, it is not too early to start some long-term planning if the government were to consider taking this forward.
‘In the short-term, we recommend government and HMRC focus on arrangements to allow self-employed taxpayers and individual landlords to use 31 March in place of 5 April when reporting their income, to facilitate Making Tax Digital for Income Tax.’
There are clear benefits in adopting a tax year which is either aligned with the calendar year or with a calendar month-end, especially given the increasing automation, internet-enabled commerce and digitisation of financial information and accounting systems generally.
A tax year aligned to the calendar year would be the natural, simplest and easiest approach for everyone to understand, OTS said. It would align with the approach in many other countries and support improvements in the use of international data to help taxpayers in fulfilling their obligations. It would also help individuals who move internationally (and, where relevant, their employers), or who have overseas income.
Moving to 31 March would also be much more understandable, align with the UK’s financial year, and assist taxpayers who prepare business accounts or report income from investments.
However, the change would impact Treasury revenues. HMRC analysts provided indicative costings, in Exchequer revenue terms, of between £0.4bn and £2.2bn in lost tax for moving the tax year end date to 31 March.
One of the main concerns with Making Tax Digital for Income Tax, which affects landlords with property income, is that it will involve an increased administrative burden on taxpayers.
Changing the tax year end could reduce this as potentially there would be fewer reporting dates. A change of tax year to 31 March would reduce the number of months where filings are needed from eight down to four, as the property business reports would be due at the same time as the self-employed business reports.
The systems impact of such a change, for government and the private sector, could be comparable with those for a change to 31 December, but the overall scale of what would be involved in a change to 31 March would be lower.
The OTS considers that any change would be best carried out after major projects such as the Single Customer Account have been completed. It would in any case not be feasible to change the tax year end date before the scheduled 5 April 2023 start date of Making Tax Digital for Income Tax.
There are clear indications that the rollout of such a major change would take a minimum of two years to plan and implement the necessary IT upgrades. There would also be an impact on self-assessment filing deadlines, as these would have to change in line with revised year end reporting dates, particularly if a 31 December deadline was adopted.
The OTS does not consider such a change should take place in the immediate future but recommends that in the short-term the government and HMRC pursue ways to formalise arrangements to allow (or even require) taxpayers to use a 31 March cut off to stand in for 5 April in respect of the calculation of profits from self-employment and from property income, ahead of the implementation of Making Tax Digital for Income Tax.
To find out how we can help you:
Accountants are warning that the increase in National Insurance contributions for businesses could discourage the creation of new jobs and potentially put some at risk, while the individual tax burden is at its highest for decades.
Under measures announced yesterday by the prime minister Boris Johnson, a new social care levy will see the introduction of a 1.25% hike in National Insurance rates for employees and employers, effective from April 2022, set to raise £12bn a year, of which £600m will be generated by an increase in the dividend tax rate.
Paul Dickson, CEO and managing partner at Armstrong Watson, said: ‘This increase in national insurance will have a big impact on business. It is effectively a tax on businesses for employing people. It will create a significant additional burden at a time when they will be dealing with the aftermath of the pandemic.
‘Not only are businesses trying to navigate out of the economic fallout of the pandemic, but they are also facing greater costs, and now they are being hit with a tax because they employ people. There is no correlation to profits. If a business was making more profit, then I think increasing tax by 1.5% would be more bearable, but it isn’t, this announcement taxes businesses based on their salary bill.
‘This increase in NIC will discourage the creation of new jobs and will potentially put some positions at risk. The government should be looking at how they can support businesses to create jobs, thereby creating more wealth to be taxed.’
The increase sees the NICs’ bill for companies increasing significantly with employer NICs’ rate now hitting 15.05% in employment related taxes.
John Cullinane, director of public policy for the Chartered Institute of Taxation (CIOT), explained: ‘National insurance contributions (NICs) are a tax on income but they are not the same as income tax. This has implications for how different groups are affected.
‘For example, NICs affect employed people differently from self-employed people. At 9% the main rate of NICs for self-employed people is 3% lower than that for employed people. In effect adding 1.25% to each figure, will not change that gap.
‘But that 3% differential is dwarfed by the 13.8% cost of employers’ NICs, levied on wages paid to employees but not on payments made to independent contractors. This will rise to, in effect, 15.05%, amounting to an increase in the total tax burden on employment of 2.5% of income compared to just 1.25% for self-employment.’
When the pandemic started, the Chancellor indicated that his long-term aim was to align the tax liability and national insurance rates between employed and the self-employed, which may be addressed in the Autumn Budget in October.
John Sheehan, partner at UHY Hacker Young, said: ‘We expect the rise in National Insurance will increase differences between employment and gig economy taxation. As a result, employers may be encouraged to make more use of self-employed workers, while shifting away from employees.
‘The government has made the point in the past that it would work on closing the gap between taxation of the employed and self-employed, however, its latest tax increase will have done the opposite.’
Paul Johnson, director of the Institute for Fiscal Studies (IFS), said: ‘A levy of 1.25% on employee earnings and on employer wage costs (so a 2.5% overall increase in the tax rate on earnings), will raise £12bn a year. The extension of this levy to those over state pension age and to dividends is welcome, but this remains a tax which will be overwhelmingly borne by workers with very little coming from pensioners. This continues a trend seen over many decades of the burden of tax being shifted towards earnings. The creation of an entirely new tax will mean yet more quite unnecessary complexity.’
Amanda Tickel, head of tax policy at Deloitte UK, said: ‘The planned increases of 1.25% in national insurance rates and dividend taxation from 2022, are expected to raise £12bn a year - more than the total tax raised by all capital gains taxes. This will have the desired impact in paying for social care.
‘It will, however, also increase the cost of employment further and when added to the tax rises announced in the March Budget, result in the highest ever sustained tax level in the UK.
‘HMRC now need to work out how to collect the levy from those above pension age who are not currently paying NI through the PAYE system, as well as looking at how ring fencing this tax to a particular cause will work in practice. This could be a complex and costly exercise and explains why some of the measures are deferred until 2023.’
The latest announcement sees the tax burden reach its highest level for decades. Isabel Stockton, a research economist at the IFS, said: ‘Following just six months after the March Budget, itself the biggest tax-raising Budget since Norman Lamont’s 1993 Spring Budget, these announcements push taxes to their highest-ever sustained share of the economy. Equivalently, government spending is set to reach a record peacetime level. Long-term challenges around rising costs of health and social care means this increase in the size of the state is likely here to stay.’
This also represents a further complication of the tax system. Cullinane said: ‘The new health and social care levy, by being established separately from National Insurance, and with slightly different rules, represents a further complication of the tax system.
‘The initial year in which national insurance will be raised will enable HMRC to build the systems to collect the levy. It Is hard to avoid seeing this as a diversion of scarce IT and other resources at a time when HMRC’s services to taxpayers and their agents are under severe strain. Presumably the government preferred to pay this price for the appearance of creating a new tax rather than of increasing rates of an existing one.’
To find out how we can help you: