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It is an unfortunate fact of current business life that more than a few businesses are making losses. This has been recognised by the Government in its extension of the loss carry-back rules. These will permit businesses to carry back trading losses for up to three years to claim back tax paid.

One year carryback has been available for some time but last year it was extended (subject to important limit-ations which I will look at below) to the two years preceding that. Hopefully, these provisions will not need to be used by your business but being aware of them when looking at financial planning for your business clients will be helpful – if only to show awareness.

Having access to cash is an important prerequisite for all businesses but especially so for those that are not doing so well. All the more reason then for financial advisers to be conversant with the rules that can allow a business to reclaim previously paid tax from HMRC through loss carryback. Cash is cash, wherever it comes from and it’s argu-ably all the more attractive if it comes from HMRC.

Knowing how the loss relief rules work will also be useful in securing or developing relationships with other professionals, especially accountants. Having and being able to demonstrate even basic tax knowledge, especially where one can make this part of the financial plan for a business or individual, will contribute to the impression of professionalism that is so important to the creation of good trust-based working relationships with both professional advisers and clients.

An obvious way in which the loss relief rules and core financial planning can combine is in connection with contributions to registered pension arrangements made by employers and especially owner-managed companies where the contribution is made for the benefit of the owner. Provided that the contribution is deductible under the wholly and exclusively test (and in most cases it would be), then a trading loss could even be created by the contribution. In most cases , for this to occur, cash would need to be available to the business to make the contribution. An obvious source will be retained and unspent profit from previous years of successful trading and cash generation.

So let’s have a look at the rules for using loss relief in a little more detail. The basic rule is that a business that carries on a trade may claim that losses incurred in that trade are set off against profits of that trade. However, relief is only available if the business is operated on a “commercial” basis with a view to making a profit.

If a business, incorporated or unincorporated, has suffered such a trading loss, relief is available for that loss. Particularly in current economic conditions, it is desirable to use the relief to maximum advantage, perhaps to secure a repayment of tax. The basic reliefs available for incorporated businesses (broadly companies subject to corporation tax) are as follows:-

  • Losses can be set off against total profits (which includes investment income and chargeable gains) of the period.

  • Unused trading losses may be carried forward and set off against the first available trading profits from the same trade in succeeding accounting periods.

  • An unlimited amount of trading loss may be carried back to set against the total profits of the immediately preceding trading period. This is the general rule which has recently been extended as I have mentioned earlier and will describe in more detail below. Total profits includes chargeable gains. Carryback is only allowed if the loss is more than the current profits, in which case it is the excess unrelieved loss that is carried back.

  • For a limited period, a trading loss may be carried back for a period of three years rather than just to the immediately preceding year. Only a maximum of £50,000 may be carried back beyond the immediately preceding year and only when trading profits for that year have been offset in full. This rule applies for company accounting periods which end between November 24, 2008 and November 23, 2010.

  • The period for trading loss carryback is extended when a company ceases to trade. In this case a loss (known as a “terminal loss”) made in the accounting period in which a company ceases to trade can be carried back and set off against trading profits of the immediately preceding three accounting periods, latest periods first. The company must have been carrying on the same trade in the “carry-back” accounting periods.

    Claims must be made within two years of the end of the accounting period in which the loss is incurred or within such further period as HMRC may allow. The claim is made on the CT 600 return. If no claim for loss relief is made or where a claim is made there remains an unrelieved loss, then the loss or unrelieved loss is carried forward without the need for a claim.

    Finally, a claim for loss relief can give rise to a repayment of tax. Interest is paid gross by HMRC on such overpaid tax. The interest is treated as income of the company and taxed under the loan relation-ship rules. Interest accrues from the “material date” which is nine months after the end of the accounting period (the date when corporation tax is normally due and payable) or the date that the tax is actually paid if later.

    The rate of interest payable is based on the average of base lending rates of certain clearing banks less 1 per cent. For example, at January 6, 2008, the rate was 4 per cent whereas in early June 2009 the rate of interest is zero.

    I will continue my look at the trading loss relief provisions next week.

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