Additional Tax Relief for Businesses Announced

The Government has announced further significant changes to the tax system to assist businesses manage the impact of COVID -19.

To summarise the proposals will:

• Allow businesses to carry-back tax losses for one year.
• The proposal temporarily allows businesses to carry losses back from the 2019/20 or 2020/21 tax years to offset against profits of the prior year.It is a one-year carry back and, while temporary, the Government will consult later this year with a view to making the rules permanent from the 2021/22 tax year.
• Put simply, if you paid tax on profits in the year to 31 March 2019 and have a loss for the year to 31 March 2020, you can use the loss to generate a tax refund from the prior year.
• This rule appears to apply to all businesses and is not restricted to companies.It also does not appear to have a requirement to prove the losses are as a result of COVID-19.
• Introduce a “same or similar business” test to allow companies to carry forward losses where they would not meet the existing 49% shareholder continuity test.
• Under the existing rules where there is a more than 51% change in shareholder continuity (re voting rights) from when a tax loss was incurred through to when it is utilised, the tax loss is forfeited.  
• As a modification, tax losses will be permitted to be carried forward, irrespective of shareholder changes, providing the company carries on in business as it did prior to the shareholder change (a “same or similar business” test).
• As the rules are based on the Australian test, their experience will provide a good starting point to understand what defines a “same or similar” business.

Conclusion

The above proposals represent a significant change in tax policy around tax losses which will be welcomed by many businesses. 

The temporary tax loss carry back is a grand departure from the historical stance on the carrying back of losses and is expected to cost $3.1b.  It will be interesting to see if it is retained on a more permanent basis.

The same or similar business test as an additional basis to allow losses to be carried forward is also a very much welcomed measure. Its proposed application for the 2020/21 year onwards may disadvantage late balance date companies (eg June or September) who suffer a COVID loss in the 2019/20 income year.

No doubt there will be nuances and fishhooks to work through when the legislation is introduced which is expected on 27^th April and will apply retrospectively.