Loss carry back for the self employed

  • 14th June 2021

You may have seen in the Budget in March 2021 that the Government announced a temporary, additional loss carry back facility for self-employed individuals making losses in 2020/21 and 2021/22. This is in addition to the normal rules which apply to losses incurred by self-employed businesses.

What are the new rules?

In simple terms, a person who has made a trading loss in 2020/21 may make a claim for additional relief. The basic rule is that relief must initially be claimed for that trading loss against other income so that, where relevant, that income is reduced to nil for both 2019/20 and 2020/21. Once that has been done, the balance of trading losses can be carried back against trading profits only in 2018/19 and then 2017/18, subject a cap of £2m. However, a deduction can only be made from the profits of the same trade.

Similar rules apply for 2021/22 losses.

Are there any other points to be aware of?

The £2m cap applies to each individual partner within a partnership.

The new rules apply to professions and vocations in the same way as for trades and also furnished holiday lets.

The new relief is similarly available for the purposes of computing the amount of profits in respect of which Class 4 NICs are payable.

HMRC example

An individual trader’s profits, losses and other income are:

2017/18 Trade Profit of £1,200,000 and Employment Income of £50,000

2018/19 Trade Profit of £1,200,000 and Employment Income of £50,000

2019/20 Trade Profit of £500,000 and Employment Income of £50,000

2020/21 Trade Loss of £3,000,000 and Employment Income of £50,000

The trader makes a claim under section 64 ITA 2007 to set the 2020/21 loss against general income of both the year of loss (£50,000) and the previous year 2019/20 (£550,000).

The remaining part of the 2020/21 loss, up to a maximum of £2,000,000, is available to carry back to set against trading profits of 2018/19 and 2017/18 (in that order), and the trader makes a claim under the new provision.

Loss set against:

1) £50,000 general income of 2020/21

2) £550,000 general income of 2019/20

3) £1,200,000 trade profit of 2018/19

4) £800,000 trade profit of 2017/18 (cap applied)

£400,000 of the loss remains available to be claimed to carry forward and set against trade profits in future years.

How do I claim relief for the loss?

A claim to loss relief will normally be made in a person’s self assessment tax return but where a claim will affect more than one year a stand-alone claim may be made outside of a return.

The claim must specify the name of the business, the period for which the loss is made, the amount of the loss, and how the loss is to be used. A stand-alone claim may be made as soon as the basis period for which the loss is made has ended and the loss has been calculated.

The time limit for making a claim to the extended relief for a trade loss in tax year 2020/21 will be 31 January 2023. The time limit for making a claim to the extended relief for a trade loss in tax year 2021/22 will be 31 January 2024.

Conclusion

HMRC will be unable to agree claims and make repayments until the Finance Bill 2021 becomes law and receives Royal Assent, probably in mid-July 2021. However, if you believe that you have made a trading loss and would like us to undertake an early review to ascertain if the new relief will be of benefit to you, please get in touch with us as soon as possible so that we can get your affairs in order and be in a position to make a claim as soon as possible.


All data and figures referred to in our news section are correct at the date of publishing and should not be relied upon as still current.