Unincorporated businesses

The affected rules are those in ITA 2007, s.64, i.e. "sideways" loss relief. This permits a trader to set off losses suffered in a tax year against general income of the same year, the preceding year, or both years. This is not automatic and must be claimed or the loss will carry forward to offset future profits. There are variations on this relief in the early or final years of trading. It is also possible to set off losses that cannot be utilised under a s.64 claim against capital gains.
The current rules are subject to the general restriction on uncapped income tax reliefs. Where they are offset against income other than profits from the same trade (e.g. in the preceding tax year), the maximum that can be used in any tax year is the higher of £50,000 or 25% of adjusted total income.
The extension provides a restricted enhancement to s.64 for losses realised in 2020-21 and 2021-22. This means that the individual must first make a claim under s.64 or be eligible to make one but has not done so as there is no other income to relieve. The extension then permits the trader to offset profits of the same trade in the three preceding tax years. The most recent year is to be relieved first.
Note that this does not extend to offsetting general income. There will be a cap of £2 million applying to each of the tax years included in the extension.
The published guidance gives the following example:
An individual trader's profits, losses and other income are:
2017 to 2018 - Trade Profit £1,200,000 - Employment Income £50,000
2018 to 2019 - Trade Profit £1,200,000 - Employment Income £50,000
2019 to 2020 - Trade Profit £500,000 - Employment Income £50,000
2020 to 2021 - Trade Loss £3,000,000 - Employment Income £50,000
The trader makes a claim under section 64 of ITA07 to set the 2020 to 2021 loss against general income of both the year of loss (£50,000) and the previous year 2019 to 2020 (£550,000).
The remaining part of the 2020 to 2021 loss, up to a maximum of £2,000,000, is available to carry back to set against trading profits of 2018 to 2019 and 2017 to 2018 (in that order), and the trader makes a claim under the new provision.
Loss set against:
£50,000 general income of 2020 to 2021
£550,000 general income of 2019 to 2020
£1,200,000 trade profit of 2018 to 2019
£800,000 trade profit of 2017 to 2018 (cap applied)
£400,000 of the loss remains available to be claimed to carry forward and set against trade profits in future years.
The affected rules are those in CTA 2010, s.37. Currently, where a company makes a trading loss in an accounting period it may be relieved by claiming loss relief against total profits in the accounting period in which the loss is made. Unrelieved losses may then be set off against profits of the preceding 12-month period. The temporary extension increases the carry back period to three years for losses arising in accounting periods ending between 1 April 2020 and 31 March 2022. There is a £2 million cap on losses made in accounting periods ending between 1 April 2020 and 31 March 2021, with a separate £2 million cap in place for trading losses incurred in relevant accounting periods ending between 1 April 2021 and 31 March 2022. This cap will apply at group level where relevant.
However, as the Budget announced the forthcoming increase in the main rate of corporation tax to 25% in 2023, it may be more efficient for a loss-making company to carry its losses forward to utilise against profits that would be chargeable at the increased rate. This will of course depend on current cash flow.
Dealing with an overdrawn Directors Loan Account
Many companies use 31 March as the accounting reference date. As such, now is a good time to review the position of directors' current accounts for close companies.
It is a common misunderstanding that if the company charges a commercial rate of interest on any loan made to the participators or employees there are no tax consequences. In fact, whilst doing this does protect against a benefit in kind arising, there is a further consideration for the company.
A charge arises under CTA 2010, s.455 where amounts are owing at the accounting year end and these are not repaid within nine months. The charge is made at 32.5% of the amount outstanding, but it is temporary and is repaid once the owed monies are repaid to the company.
s.455 doesn't apply to:
loans made in the ordinary course of the company's business. This includes not only loans made by banking businesses but also credit terms on the sale of goods to a participant which are the same as the credit facilities offered to members of the general public, providing the credit period does not exceed six months
loans not exceeding £15,000 in total, made to directors or employees working full time for the company (or an associated company) who do not have a material interest (broadly this means controlling more than 5% of the share capital, or rights to assets) in the company; and
since 25 November 2015, loans to charitable trustees for charitable purposes.
However, the charge does apply to overdrawn directors' current accounts. The £15,000 exception doesn't apply if the director is also a shareholder with a material interest - there is no de minimis on the size of the loan that will trigger a charge.
The nine-month grace period does give the director an opportunity to pay the loan back. However, many may struggle to do that from private funds this year due to the Covid-19 crisis.
Fortunately, as participators in close companies tend to have a high degree of control over their remuneration, there are some other options to help.
Vote a bonus
Voting an additional payment of salary and crediting this to the overdrawn account is one method. The advantage of doing this is that it attracts a deduction from the company's taxable profits. The drawback is that it must be processed via the payroll, and have tax and NI deducted.
Vote a dividend
This is similar method but involves crediting a dividend instead of a salary. There is no deduction for corporation tax, but there is no NI to pay either. The dividend will be taxable in the hands of the participant, but at lower rates that apply to bonuses. It will also be payable via self-assessment rather than PAYE so there is a timing advantage.
This will only be an option if there are distributable profits to pay dividends from. This may be affected by Covid-19, so a company must exercise additional caution to ensure a clear picture is obtained before voting the dividend.
Write off the loan
If the loan is formally written off, the participant is treated as receiving a distribution equal to the amount released. There is a risk that HMRC will try to treat this as "earnings" for NI purposes, so if available the dividend option is usually better. The write-off should be made formally in writing, or there is a further risk that the debt would be pursued in the event of a liquidation.
Tax relief for loans used for businesses
There has been an unprecedented amount of support for businesses struggling due to Covid-19. However, back at the start of the crisis there were delays in the various schemes being set up. Additionally, a high number of newer businesses were completely ineligible. Many company owners used personal borrowings to help keep the business afloat and pay employees, as banks pulled credit products from the market.
Let's take a simple case study of a company owner who has two employees. She and her husband (not involved with the company) remortgaged their house to raise funds. She loaned this to the company, enabling her to keep trading and paying one of her employees. The other employee was furloughed, and some of the funds were used to top up their salary to 100% of its usual rate.
The owner will be able to claim tax relief for the interest paid on the remortgage. This will be proportionate to the amount loaned to the company compared to the overall borrowing level. For example, if the interest on the whole mortgage for a tax year was £12,000, the average balance £400,000 and the average balance of the loan to her company was £100,000, the owner can claim tax relief on £3,000 of interest (100,000/400,000 x £12,000).
The fact that the loan is in joint names would appear to introduce a complication, i.e. that relief may be restricted to 50% of the relevant interest. However, HMRC's guidance confirms that this is not the case in SAIM 10030:
"Where a husband and wife take out a joint loan but only one spouse uses the loan in a form that meets the qualifying conditions, that spouse would be entitled to full relief on the relevant amount of interest paid, even if the joint liability is satisfied out of a joint account."
Added By: Sharon Worger on 14th Apr 2021 - 14:46
Number of Views: 88
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