How to carry back income tax losses

Many unincorporated businesses made a loss in the tax year 2020/21, due to the pandemic. Now it’s important to make the most of such losses.

By carrying back the trading losses to an earlier tax year in which you made profits in that trade, you may be able to generate a tax refund.

The first step is to calculate how much trading loss you can carry back. To reach that figure we need to tot up any covid related furlough or self-employed grants you received plus local authority business support grants.

The SEISS grants are treated as part of your income of the tax year in which they were received. The first three SEISS grants were paid in the 2020/21 tax year, so must be set-off against the trading loss from that year before the balance of any loss is carried back.

You can make a stand-alone claim to carry back losses as soon as your accounting year has finished. You don’t have to wait until you have all the other details required for your 2020/21 tax return in order to claim the loss.

The carry-back claim can set the 2020/21 loss against profits in up to three tax years: 2019/20 (where it can be set against total income, e.g. including rental income), 2018/19 and 2017/18 (although the set-off in the earlier two years is only against profits of the same trade as that which produced the loss).

For the loss set-off to be accepted by HMRC, you need to show that the loss arose from a commercial trade that was carried on with a view to making a profit. Unfortunately, losses from letting property can’t be carried back at all.

It may be that your loss has been incurred in one of the first four tax years of your trade, or that you have decided to cease trading after making losses. These situations add complexity to loss calculations and may give alternative options for relieving a loss.

Note that certain trades, such as farmers and market gardeners, have further conditions attached to the carrying back of losses.

If your business has made a loss, make sure you speak to us about the best way of using it up and of getting tax repayments as speedily as possible.