Dáil Éireann Debate, Wednesday - 2 December 2020
49. Deputy Éamon Ó Cuív asked the Minister for Finance if tax losses made in the tax year 2021 due to the Covid-19 pandemic will be able to be offset against profits for the tax year 2020 for persons whose tax returns are based on an accounting year from 1 April to 31 March each year; and if he will make a statement on the matter. [40705/20]
View answerI assume the Deputy is referring to the accelerated loss relief provisions that I introduced earlier this year to assist companies and self-employed individuals that have been adversely impacted by the COVID-19 pandemic and related restrictions.
Dealing with income tax first, section 10 of the Financial Provisions (Covid-19) (No. 2) Act 2020 introduced a new Chapter 2A ‘Income tax: Covid-19 loss relief’ in the Taxes Consolidation Act 1997 (‘TCA 1997’). This provides for a number of temporary income tax measures to assist self-employed individuals. Section 395A TCA 1997 provides for income tax relief for losses incurred in the period 1 January 2020 to 31 December 2020 by individuals carrying on a trade or profession, either as sole traders or in partnerships. The section provides that where, in a tax year, an individual carrying on a trade or profession:
- incurs a loss which would be available to carry forward to the following tax year, and
- all or part of the loss is incurred in the period 1 January 2020 to 31 December 2020,
then the individual may claim to have any part of the loss that is incurred in the period 1 January 2020 to 31 December 2020 carried back and set off against the profits of the same trade or profession for the tax year 2019. Subject to meeting certain conditions, self-employed individuals may make an interim claim for relief in respect of an estimated amount of the relief that will be due to them under section 395A TCA 1997. Similar provisions apply in respect of unused capital allowances relating to the period 1 January 2020 to 31 December 2020. The maximum amount of relief that an individual may claim in respect of losses and capital allowances is capped at €25,000.
Where a self-employed individual incurs losses in the tax year 2020 and the tax year 2021, relief will be available where, in the tax year, part of those losses were incurred in the period 1 January 2020 to 31 December 2020. Therefore, the loss relief will be available to a self-employed individual who prepares their annual accounts on the basis of the period 1 April to 31 March each year. Examples setting out the operation of this relief are contained in Revenue’s Tax and Duty Manual Part 12-01-03, which is published on Revenue’s website.
Turning now to corporation tax, section 11 of the Financial Provisions (Covid-19) (No. 2) Act 2020 introduced a new section 396D in the TCA 1997. The provision allows companies, subject to certain conditions, to make a claim to carry back up to 50% of their estimated trading losses incurred in an accounting period which contains some or all of the period 1 March to 31 December 2020, against their profits of the preceding accounting period.
Under normal rules, this carry back would not take place until up to nine months after the end of the loss-making accounting period, when the corporation tax return is filed. The accelerated corporation tax loss relief allows claims to be made (and revised if necessary) at any time from four months into the loss-making accounting period and up to five months after the end of that accounting period. This significantly accelerates the tax repayments to companies that can be generated from the offset of these losses against previously taxed profits. The balance of the loss will be available for carry back in due course under normal rules, when accounts have been prepared after the end of the company’s accounting period and a corporation tax return has been filed. Therefore, provided it satisfies the relevant conditions, a company with a 12-month accounting period ending in March 2021 will be allowed to project the trading loss that it expects to suffer in its 2021 tax year and to lodge an early claim for carry-back of some of that expected loss against taxable profits of the prior year, being the accounting period ended 31 March 2020.
Income tax example
A self-employed trader prepares his tax returns on the basis of the period ended 31 March each year.
For the tax year 2020, the basis period is: 1 April 2019 – 31 March 2020. If the trader incurs a loss in the tax year 2020 (i.e. in the period 1 April 2019 – 31 March 2020), the loss relief will be available for that part of the loss that was incurred in the period 1 January 2020 to 31 March 2020.
For the tax year 2021, the basis period is: 1 April 2020 – 31 March 2021. If the trader incurs a loss in the tax year 2021 (i.e. in the period 1 April 2020 – 31 March 2021, the loss relief will be available for that part of the loss that was incurred in the period 1 April 2020 to 31 December 2020.
However, regardless of whether the loss was incurred in the tax year 2020 or the tax year 2021, where relief is available the loss is to be carried back and set off against the profits of the same trade or profession for the tax year 2019. The rationale for this is that it was, and is, considered that it would be more beneficial to businesses to have the losses set back to a period during which the COVID-19 restrictions were not in place and normal trading conditions applied.
