Enhanced cash flow advantages can be obtained on the carry back of trading losses following the Pre Budget Report

How can businesses benefit from the change announce to trading loss relief following the Pre Budget Report?

What were the old rules?

Previously all individuals making a loss from carrying on a trade, profession or vocation could offset the trading loss against total income within the loss making  year and /or against total income of the prior tax year. Any remaining loss is then available to carry forward against  profits of the same trade, starting with the earlier year first until the loss is fully utilised. If a claim to trade loss relief has been made against general income, or if it cannot be made as there is no general income against which to offset the loss, a person may also claim to treat any unrelieved loss as a capital gains tax loss of the tax year in which relief is claimed against general income.

Previously, companies making a trading loss in an accounting period can claim for that loss to be offset against any profits, of any description, of the same accounting period. Any unused losses can be offset against profits of the preceding 12 month period, or carried forward against trading income from the same trade of subsequent accounting periods.

How does the relief work?

Following the pre budget report, for the 2008/09 tax year, in addition to the above, individuals making a loss from carrying on a trade, profession or vocation will be able to carry back their trading losses to the previous three years.  There will be no change to the current one year unlimited carry back of trade losses, however, for the extended relief a maximum of £50,000 of the remaining loss can be carried back against profits of the same trade from 2005/06 and 2006/07. To be offset against profits of the most recent year first.

Loss relief for companies will also be extended so that losses incurred in the periods ending between 24 November 2008 and 23 November 2009 will have the advantage of the additional provisions, and shall be able to carry back the losses three years, with losses to be set first against profits of most recent years, before carry back to earlier years.

There are additional 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. These reliefs will remain unchanged by the extended provisions.

An example of how the claim would work for a sole trader business is outlined below:

The individual's profits, losses and other income are:

2005/06 Trading Profit £ 40,000 Rental Income £ 5,000
2006/07 Trading Profit £ 35,000 Rental Income £ 5,000
2007/08 Trading Profit £ 30,000 Rental Income £ 5,000
2008/09 Trading Loss £100,000 Rental Income £ 5,000

The individual makes a claim to set the 2008/09 loss against general income of both the year of loss (£5,000) and the previous year 2007/08 (£35,000).

The remaining part of the 2008/09 loss, capped up to a maximum of £50,000, is available to carry back to set against trading profits of 2006/07 and 2005/06 (in that order).

Loss set against:

1)  £5,000 Rental income of 2008/09
2)  £35,000 Rental income + trading profit of 2007/08
3)  £35,000 Trading profit of 2006/07
4)  £15,000 Trading profit of 2005/06 (cap applied)
             ---------
            £90,000
            =====

Therefore losses of £10,000 (£100,000 less £90,000 claimed) are available to carry forward to set against profits of the same trade in future years.

How can business make the claim?

The enhanced carry back in respect of trading loss relief will be introduced in the Finance Bill 2009 and will have effect from Budget Day (likely to be during March 2009).  If businesses are in a position to establish their losses, and hence the potential repayment claim following the loss carry back, HM Revenue and Customs have stated that they will accept a claim for the loss from 24 November 2008, with a view to making the repayment due on or as soon as possible after Budget Day.

Although a standalone claim can be made in respect of the losses, as opposed to a full return, establishing the businesses losses may prove difficult where a business has other priorities and is struggling to keep it's head above water.

Francesca Lagerberg, Head of National Tax office at Grant Thornton says: "A return to the ability to carry back uncapped losses three years would have been desirable, but even so this measure will be a big help in providing cash refunds to all businesses that have recently incurred losses but have been profitable in the last few years."

Please contact us if you would like further advice on any of the above.