Tax Losses, accounting date considerations
Tax Alert November 2009
Businesses which incur tax losses can, for a temporary period, carry those losses back three years and obtain tax refunds in respect of tax paid in those earlier years. This temporary measure, introduced last autumn in the Pre Budget report affects both income and corporation tax, although the way the relief works and the precise period for which relief is available varies between the two taxes.
This article flags up the way in which your business accounting date can affect the amount of loss relief you could claim.
Businesses affected by income tax, sole traders and partnerships, can carry back losses under these provisions suffered in accounting periods, of any length, ending in the tax years 2008-09 and 2009-10.
Businesses that pay corporation tax can carry back losses under these provisions suffered in accounting periods, again of any length, ending in the two year period from 24 November 2008 to 23 November 2011.
With no change of your usual accounting date, only two trading year’s profits or losses will be affected. For instance if you are a sole trader and have a 31 March year end, the year’s results affected will be to 31 March 2009 and 31 March 2010. However if your accounting date is say 30 April the two years available for the loss carry back with no change of accounting date are 30 April 2008 and 30 April 2009. If your business was late to be affected by recession you may still be making losses after April 2009. If this is the case you could consider shortening the accounting period to 30 April 2010 to the eleven months to 31 March 2010. In this way you could look at using losses in the trading years to 30 April 2008 and 2009 and also the eleven months to 31 March 2010.
The calculations for companies are based on different date criteria but similar principals apply.
It is not always advisable for other tax planning reasons to change your accounting date! In certain circumstances a change of accounting date may be blocked due to Companies Act and tax law considerations.
However the availability of the extended loss relief should be investigated if tax paid in previous years can be recovered. Please contact us if you would like more information on this topic.
