Tax Institute welcomes ‘cost-effective and helpful’ tax refund for business

3 Mar 2021

The Chartered Institute of Taxation (CIOT) has welcomed today’s announcement that the trading loss carry-back rule will be temporarily extended from one year to three years, giving affected businesses a billion pound corporation tax refund.

CIOT President Peter Rayney said:

“This is excellent news – and something CIOT has been suggesting over the past year. Allowing businesses to benefit from a three-year carry back of trading losses arising during the pandemic will give businesses with a track record of making profits and paying tax – a good proxy for long-term viability – but which have suffered during the pandemic, a much-needed cash injection.

“It will also be cost-effective. The government’s figures show it will essentially give businesses an extra billion pounds now, thanks to tax refunds, while their future bills will be collectively about a billion pounds higher because, having used them, they won’t have the losses to carry forward and use against future profits.”

Commenting on the corporation tax increase to 25% and reintroduction of a small profits rate Peter Rayney said:

“This is a big change in direction of government policy, following a decade of corporation tax cuts and the abolition of the previous small profits rate after 2014.

“The reintroduction of the small profits rate will obviously be welcomed by those who benefit from it. However it does miss an opportunity to allow the increased corporation tax rate to reduce the imbalance between the tax burdens on employment, self-employment and those operating through a company. Although the upper limit of £50,000 annual profits to the new small profits rate1 is lower than it was in the past, it will still benefit very many of those service providers who might have remained unincorporated (or might even have operated as employees) but for perverse fiscal incentives. It will also add to the complexity of the system.”

Peter Rayney added:

“The combination of the corporation tax increase and extended loss carry-back may give some businesses a dilemma – use current losses for relief on past corporation tax bills at 19 per cent, getting the money now, or banking on profits returning in future and keeping the losses to get relief at 25 per cent in a few years’ time. But most businesses will probably think it better to have that choice than not.”

Commenting on the introduction of a ‘super deduction’, allowing companies to reduce their corporation tax bill by 130% of the value of their investment for two years, Peter Rayney said:

“This will be a real incentive to investment, and will help tip the balance in favour of some marginal investment proposals. It will make most difference to larger businesses, as smaller ones benefit proportionally more from the existing Annual Investment Allowance; indeed the smallest businesses that do invest often pay no tax as a result. The Chancellor may have feared that without this new break, larger companies would have had a fiscal incentive to defer investment until 2023 when the higher rate of corporation tax came in, in order to attract the corresponding higher rate of relief.2

“That said, the CIOT believes there has been too much tinkering with rules and rates of capital allowances, and that frequent changes more often than not bring complexity and uncertainty, and undermine investor understanding of, and confidence in, what is on offer at any one time.  This further temporary measure leaves unresolved the question of what is the ongoing permanent level of support through tax system for corporate investment.3


£50,000 profits limit (with a taper to £250,000) is much lower than the old £300,000 lower profits limit (with marginal relief to £1,500,000): this is likely to benefit a much smaller number of companies than previously.

  1. The clue to this is in para 2.111 of the Red Book which says that the ‘super deduction’ will mean that investing companies will get 25% effective relief (despite the continuing 19% tax rate). There will actually be a fiscal incentive to bring forward investment as all the relief will be given upfront in a First Year Allowance rather than spread over many years as normal.
  2. The Annual Investment Allowance (AIA) is currently at £1million, which is a ‘temporary’ increase (from an AIA limit of £200,000) for the two calendar years 2019 and 2020, and extended for another year, by an announcement in November 2020. Businesses would benefit if they knew what levels of investment would attract the AIA for many years ahead