Belfast Telegraph

Optimum utilisation of tax losses for businesses

Jonny Darling
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Has your business made a loss in the last couple of years? If so – you may have a decision to make.

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NI businesses have been particularly tested over the last number of years, not only from the Covid-19 pandemic and the implementation of the NI Protocol but furthermore by the current “cost of living crisis”. These challenges have impacted the bottom line for NI businesses, pushing many companies into loss-making positions for the first time.

If you tuned in to Jeremy Hunt’s Autumn Statement, you should be aware that, finally, we have some clarity on the UK Corporation Tax rate going forward. After a highly publicised u-turn on the matter, the UK Corporation Tax rate will indeed increase from 19%, to 25%, from 1 April 2023.

So how can you help your business navigate through these difficult times, while preparing for an increased Corporation Tax rate?   

One consideration is how your business utilises its tax losses in the most optimal manner. Prior to April 2020, where a company generated a tax loss from its trade, it could either carry the loss forward to be offset against future profits or carry it back against profits in the previous one year.

As part of the UK government’s response to the COVID-19 pandemic, a temporary relaxation on the loss carry-back rule was introduced. As a result, tax losses generated in a financial period ending between 1 April 2020 and 31 March 2022 can be carried back three years instead of just one. This relaxation has allowed businesses to carry back losses generated to obtain refunds of previously paid Corporation Tax.

With the UK Corporation Tax rate increasing to 25% an extra layer of thinking is required in terms of how to utilise such losses. Companies can still carry back the loss and reclaim Corporation Tax previously paid at 19% and the immediate cash injection under this option will certainly appeal to many businesses.

However, if a company is expecting to return to profitability, consideration should be given to carrying the losses forward to shelter profits subject to tax at 25%. In the short-term, the business will not receive that much needed tax refund into its bank account, carrying forward the losses could result in an additional tax saving of 6% in the future.

This point is even more acute for companies that would have historically completed Research and Development (R&D) claims under the Small and Medium Enterprises (SME) scheme and surrendered their tax loss (relieved at 19% once profitable) for a tax credit of 14.5% in cash.

Deciding against taking this tax credit now and instead carrying forward the losses to shelter profits arising post-April 2023 at the 25% rate could present an additional tax saving of 9.5%.  Furthermore, for tax losses generated post-April 2023, companies will be even more incentivised to retain their losses as, following the Autumn Statement, the SME tax credit reduces from 14.5% to 10%.  Deciding not to cash in tax loses for an immediate tax credit could save up to 15% going forward.

As we bear the brunt of this economic downturn in the short-term, for many it may prove more valuable to play the long game.