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Temporary extension to trading loss carry-back rules - implications for deals

Tax Bite – Temporary extension to trading loss carry-back rules – implications for deals

We noted in a previous Tax Bite that the Spring Budget on 3 March 2021 included proposals for a temporary increase in the carry-back period for trading losses in response to the impact upon businesses of the COVID-19 pandemic. In certain circumstances the carry back period has been extended to the three previous accounting periods instead of the usual one. The new rules have recently been formally enacted through the Finance Act 2021 and related regulations.

The Changes to the Rules

In summary, these rules allow corporation tax trading losses incurred in accounting periods ending between 1 April 2020 and 31 March 2021, and between 1 April 2021 and 31 March 2022, to be carried back for up to three years, rather than the normal one year. The one-year carry-back remains unlimited, but the extension to the previous two accounting periods is limited to £2,000,000 of losses. That £2,000,000 is per accounting period, i.e. for each of the FY21 and FY22 accounting periods, so in theory claims could be worth up to £760,000 (£2m x 19% x 2 years).

As usual, where there is a group, the limits on claims are calculated on a group-wide basis.

There is a de minimis of up to £200,000 of claims per year that can be made outside (and so in advance of) the corporation tax return potentially generating faster cash recovery, otherwise the claim has to be made in the return for the period to which the loss relates (and claims for a period ending between 1 April 2021 and 31 March 2022 cannot be made before 31 March 2022).

Potential Relevance on Deals – Employee Share Option Deductions

These temporary rules will apply whether the trading loss is caused by COVID-19 factors or not. We have been engaging with the new rules already on transactions where employee share options (e.g. EMI options) are being exercised on the deal, and the resulting corporation tax deduction gives rise to (or further increases) significant losses in the target company in the accounting period when the options are exercised.

The treatment of the benefit of this relief on deals is often a subject of significant interest and negotiation for the parties and advisers. Sellers are much more likely to be able to ask for the value of the benefit up front, or at least earlier payment, where it can be shown that the deduction will give rise to an imminent cash saving because it can be absorbed by profits that are already there, or very likely to be there, for the current period and prior periods. The 2 year extension to the carry back period should therefore not be overlooked and may make these share option corporation tax deductions even more valuable than they would otherwise be.

Even if the deduction cannot be used in the current period or by way of carry-back, it should not be forgotten that unused trading losses are automatically carried forward, so sellers should be thinking about deferred consideration provisions in the SPA to ensure that, as and when losses accrued up to the point of completion of the deal are used to save tax in future, the sellers are credited for that saving. This of course assumes the losses have not already been treated as an asset, and so paid for by the buyer, at the outset, although that is rare in respect of losses that are to be carried forward.

Careful drafting is required when negotiating these provisions in an SPA, for example to address points such as the anti-loss buying rules, which disallow carried forward losses where there is a major change in the nature or conduct of the target company’s trade within a certain period either side of the change of control of the company.

If you are dealing with transactions involving option exercises or where the target otherwise has losses, this temporary extension to carry-back relief should be on your radar. As always, if you would like our help with this please do get in touch.


Posted on 31/01/2022 in Tax News, EMI Options

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