With the economy hit hard by COVID-19, many unincorporated businesses will make losses this year, perhaps for the first time. A sole trader has great flexibility in how losses can be used and these rules also extend to members of partnerships and LLPs, subject to restrictions for non-active partners and limited partners.
For losses incurred in the first four tax years of a new unincorporated business, there is the option to carry back the loss against total income of the three preceding years. This can potentially lead to large repayments of tax previously paid at the higher or top rates, if the business owner was previously in high-earning employment. Otherwise, there is normally only a one-year carry-back available against total income.
However, the Chancellor has introduced a temporary extension to this one-year loss carry-back, such that trade losses can be carried back a further two years, but against trade profits only. This will produce repayments of tax where a currently loss-making business was previously profitable.
This extended carry-back can be used for losses of the tax years 2020/21 and 2021/22. For each year, there is a cap on the amount of loss that can use the extended carry-back, but as this is set at £2m it will not impact most businesses.
There are other options for losses, including setting them against Capital Gains in some circumstances, special rules on cessation of trade and carrying a loss forward against future trading profits. There are lots of detailed rules for each of these options and different dates by which claims must be made.
If your business is currently making losses, make sure you discuss with us the optimum way of using them, so that you can maximise your potential tax repayments. This will aid your cash flow in these difficult times.