Following the government’s announcement in March, businesses that incur trading losses can now carry them back up to three years instead of the usual one. This temporary extension applies to trading losses made by companies in accounting periods ending between 1 April 2020 and 31 March 2022, and by unincorporated businesses in tax years 2020/21 and 2021/22.
The effect of this is that businesses will be able to offset trading tax losses against taxable profits in previous years on which they have already paid tax, with a resulting tax refund arising. This measure could provide a welcome cashflow benefit to farming businesses who have suffered trading losses, possibly as a result of the pandemic where in some cases produce prices plummeted, or through high capital allowances on the purchase of new machinery.
There are caps that have been set on how much loss can be carried back to the earlier years with a limit of £2m for losses carried back to years 2 and 3. In the case of unincorporated businesses, losses carried back to the previous year can be set against total income, subject to a limit on how much can be relieved against non-trading income (rent, dividends etc.). Losses carried back to years 2 and 3, however, can only be set against profits of the same trade. Company trading losses can be carried back against total profits for all three years, up to the capped amount.
Unincorporated farming business still need to be watchful of the “hobby farming rules” where the ability to offset tax losses is denied if a loss before capital allowances arises for six consecutive years. With the reduction in Basic Payment income, and farming businesses searching for alternative non-farming sources of income, the fear is that the tax effects of the hobby farming rules will become much more prevalent, although clearly in many cases farming is much more than a hobby.
Farming businesses faced with continued trade losses should seek advice from their accountant to ensure that the benefits of these reliefs are not lost.