We are facing the worst recession in 300 hundred years, according to Bank of England
Worse than the Napoleonic wars 1812 to 1821
Worse than the Great Depression of the 1930’s
Worse than the 2 World Wars
Worse than the Financial Crash of 2008
The IMF predicts the UK economy will shrink by 6.5% in 2020, compared with the IMF’s January forecast for 1.4% GDP growth.
The Office for Budget Responsibility (OBR) said unemployment could hit 3.4 million – up from 1.3 million – leaving around one in 10 of the working population without a job, while the economy may shrink by 35% between April and June.
Businesses will make losses this year!
How can those losses into cash refunds?
Carry back the losses! Reclaim tax you have previously paid
You will probably need your accountant to help you, here are the basics
Historically most businesses have simply carried forward losses but you can carry them back
Corporation Tax
Instead of carrying a loss forward, you can claim for the loss to be offset against profits for the earlier 12 month period (not accounting period).
You can make a claim to carry back a trading loss when you submit your Company Tax Return for the period when you made the loss.
Self Employed
You may use the loss against your income of 2019 to 2020 or 2018 to 2019 or both years.
You can make this claim for losses made in the first 4 years of trade. Start with 2016 to 2017 income.
If the loss is more than your income use the remaining loss against your income in 2017 to 2018 and then 2018 to 2019.
Do not make this claim if you, your spouse or civil partner first carried on the trade before 6 April 2016.
Corporation Tax – Carry a trading loss back
Instead of carrying a loss forward, you can claim for the loss to be offset against profits for the earlier 12 month period (not accounting period).
You can only do this if your company or organisation was carrying on the same trade at some point in the accounting period or periods that fall in the earlier 12 month period.
For example, if your company or organisation has a loss of £8,000 in the accounting period 1 January 2016 to 31 December 2016 and profits of £20,000 in the earlier 12 months, you can carry back the £8,000 loss to be set off against the profits for the previous accounting year, this will reduce them from £20,000 to £12,000.
If an accounting period straddles that 12 month period, the profit for that period is apportioned and the loss can only be offset against that portion of the profit that falls within the 12 month period.
For example, your company or organisation has a loss of £8,000 in the accounting period 1 January 2016 to 31 December 2016 and it’s recently changed its accounting date, so that the accounting periods and profits of the earlier periods were:
- £2,000 for 1 July 2015 to 31 December 2015
- £10,000 for 1 July 2014 to 31 July 2015
You can carry back £2,000 of the loss to cover the whole of the profit in the period ended 31 December 2015.
The balance of the loss of £6,000 cannot be entirely carried back as only 6 months of the profits of £10,000 fall into the earlier 12 months of the loss making period.
Only a loss of £5,000 (6/12 x £10,000) can be used, and the balance of £1,000 is available to be carried forward to the year ended 31 December 2017.
How to claim for a trading loss to be carried back, or amend a claim
You can make a claim to carry back a trading loss when you submit your Company Tax Return for the period when you made the loss.
You can make your claim in your return or in an amendment to the return, as long as you’re within the time limit to amend it. You can also make your claim in a letter.
If you’re making a claim in your return that reduces your Corporation Tax liability for an earlier period, you must make sure you have put an ‘X’ in the appropriate box on the CT600 form.
A claim should be made within 2 years of the end of the accounting period when you made the loss. Your claim should include:
- the name of your company or organisation
- the period when the loss is made
- the amount of the loss
- how the loss is to be used
If you send your claim separately, send it to HMRC.
https://www.gov.uk/guidance/corporation-tax-calculating-and-claiming-a-loss
Income Tax – Using losses: types of claim
Trade losses may be used in a number of ways against:
- income or possibly against capital gains of the same year or an earlier year
- profit of the same trade
- income from a company to which you transferred your trade.
Not all losses may be claimed in all of these ways and sometimes the amount of loss you claim is restricted or limited.
https://www.gov.uk/government/publications/losses-hs227-self-assessment-helpsheet/hs227-losses-2020
Loss set-off against income or income and capital gains
You may use the loss against your income of 2019 to 2020 or 2018 to 2019 or both years. The loss you claim against income will normally be the whole of the loss. If the loss is more than your income, claim the figure of income. You may be able to use the remaining loss, or part of it, against your chargeable gains.
Loss used against income in 2016 to 2017 to 2018 to 2019: early trade losses relief
You can make this claim for losses made in the first 4 years of trade. Start with 2016 to 2017 income.
If the loss is more than your income use the remaining loss against your income in 2017 to 2018 and then 2018 to 2019.
Do not make this claim if you, your spouse or civil partner first carried on the trade before 6 April 2016.
If you make any of these claims, make sure that you include losses claimed by you other than in your tax return. The section on stand-alone claims gives more on this.
If you use the loss against earlier year’s income or capital gains you must also tell us the:
- amount of loss used for each year in the ‘Any other information’ box on the return
- decrease in tax due for earlier years
The amount of loss relief you claim against income or capital gains may be restricted or limited for example if you:
- worked for less than 10 hours a week on average on commercial activities of the trade
- are a Limited Partner or a member of a Limited Liability Partnership
- have a trade which is carried on wholly overseas
- have claimed certain capital allowances
- have income from oil extraction activities or oil rights
If you need more information on any of the restrictions on relief, ask us or your tax adviser.
There’s a limit on the total amount of Income Tax reliefs that you may claim for deduction from total income for a tax year. Loss relief is one of the reliefs affected. The limit is the higher of £50,000 and 25% of the adjusted total income of the year. See Helpsheet 204 if you think you may be affected by this.
Example
Phil has a total income of £70,000 in 2019 to 2020 and makes a trading loss in that year on one of his businesses of £60,000.
The maximum amount of relief Phil can set against his total income for 2019 to 2020 is £50,000 as this is the greater of £50,000 and 25% of his income. The remaining £10,000 loss can be carried forward.
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