Budget Comment 2009

Another year to carry losses back

Unincorporated businesses which made losses as a result of carrying on a trade, profession or vocation can offset a trading loss against total income assessable in the relevant tax year and/or against total income of the preceding tax year. Any remaining loss is then available to carry forward against profits of the same trade, starting with the earliest year first until the loss is fully utilised.

Companies making a trading loss for an accounting period can claim for that loss to be offset against any profits, not just trading income, of the same accounting period. Any unused losses could be offset against all profits of the preceding 12 month period, or carried forward against profits of the same trade in subsequent accounting periods.

As announced in the Pre-Budget Report in November 2008, for unincorporated businesses making a loss from carrying on a trade, profession or vocation assessable in 2008/09, there will now be the facility to carry back trading losses to the previous three tax years. The current one year carry back of trading losses against all income remained unchanged. However, for losses arising in the 2008/09 tax year only, a maximum of £50,000 of the remaining loss can be carried back against profits of the same trade, profession or vocation to 2005/06 and 2006/07. Losses must be offset against profits of the most recent tax year before those from earlier years.

The loss relief for companies was also extended so that losses incurred in accounting periods ending between 24 November 2008 and 23 November 2009 will benefit from the extended carry back period. Losses can be carried back for three years (ie 36 months, not three accounting periods), and set first against profits of more recent years, before carry back to earlier years. Again, the total extended carry back may not exceed £50,000, disregarding the unlimited one-year carry back normally available. However for companies, the losses may be offset against all profits of earlier accounting periods and is not restricted to trading profits.

The provisions announced in the Pre-Budget Report have now been further enhanced. The Finance Bill 2009 will extend the period in which trading losses arise and can be carried back against previous profits. The extension will now apply to trading losses made by companies in accounting periods ending between 24 November 2008 and 23 November 2010, and trading losses made in tax years 2008/2009 and 2009/2010 by unincorporated businesses.

The amount of trading losses which 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. The £50,000 limit applies separately to the unused losses of each 12 month period within the duration of the extension. Therefore, businesses could potentially carry back an extra £100,000 of losses in addition to the unlimited carry back to the preceding year.

The provisions for losses incurred during the first four tax years, or during the final year in which a trade, profession or vocation is carried on, or for trading losses incurred in the final accounting period of a company will remain unchanged.

What about repayments?

If businesses are in a position to establish their losses (via completion of a tax return) and hence the potential tax repayment, following the loss carry back, HM Revenue & Customs (HMRC) has stated that it will accept a claim for the loss from 24 November 2008, with a view to making any repayments due on, or as soon as possible after, Budget Day 2009.

HMRC has also stated that for unincorporated businesses a stand alone claim can be made in year, ie before the end of the tax year but after the end of the accounting period, if the unincorporated business is satisfied that it will make sufficient losses to cover the claim.