UK Trading Losses: Carry Back, Forward and Sideways—A Complete Guide for Business Owners

Trading Losses in a UK Company: Carry Back, Forward and Sideways

If your UK company has made a trading loss this year, you have several powerful ways to use it to reduce your overall tax bill. You can offset that loss against profits from earlier years, set it aside for future profits, or claim it against other income your company has earned. Understanding which relief to claim—and in what order—is crucial to minimising corporation tax.

This guide walks you through the three main relief mechanisms available to UK-resident companies, recent changes to the rules, and the practical steps to claim them.

What Is a Trading Loss and When Does It Arise?

A trading loss occurs when your company's allowable expenses exceed its trading income in a given accounting period. "Allowable expenses" include staff costs, rent, utilities, materials, and depreciation on plant and machinery, all calculated according to UK tax law. However, some costs—such as entertaining, fines, or donations to political parties—are not allowable and cannot be deducted.

Once you have established a trading loss, you have discretion about which relief to claim and in which order. This matters enormously, because the rules that govern each type of relief (and their priority) have changed several times in recent years, most significantly in the Finance Act 2020 and onwards.

Loss Carry-Forward: The Default Route

Carry-forward relief allows you to set off your trading loss against trading profits in future accounting periods, with no time limit. This is the most commonly used relief and requires no election—it applies automatically.

How Carry-Forward Works

• Your loss is carried forward and offset against the first available trading profit in the next period.
• If your loss is larger than the profit in that period, the remainder carries forward to the next period, and so on.
• There is no time limit; your loss can be carried forward indefinitely.
• A loss is only carried forward to offset trading profits; it cannot offset other types of income under carry-forward relief.

A Worked Example

Imagine your UK company reports a trading loss of £50,000 in Year 1. In Year 2, it makes a trading profit of £30,000. Carry-forward relief automatically sets off £30,000 of the loss, leaving £20,000 to carry into Year 3. If Year 3 profit is £25,000, the remaining £20,000 loss is used, and only £5,000 of the Year 3 profit is taxable.

This is simple and reliable but means you get no tax benefit from the loss until you return to profit.

Loss Carry-Back: Immediate Tax Refunds

Carry-back relief lets you set off a trading loss against trading profits in earlier accounting periods. This is elective (you must claim it) and can deliver an immediate refund of corporation tax if the prior year was profitable.

Key Rules on Carry-Back

• You can carry back a loss to the 12 months immediately preceding the loss-making period.
• The loss is set off against trading profit only (not other income or gains).
• Carry-back must be claimed in writing, usually within 12 months of the end of the loss-making period, though HMRC can extend this at their discretion.
• If you claim carry-back for part of the loss, the remainder may be carried forward or used for sideways relief (see below).

For official detail on the carry-back mechanism and qualifying periods, see HMRC's guidance on corporation tax losses.

Why Use Carry-Back?

Carry-back is most valuable when:

• You have returned to profitability and want immediate cash flow relief.
• You face a corporation tax rate rise in the future and want to secure relief at the current (lower) rate.
• You are planning a significant corporate restructuring or potential exit.
• You need to recover corporation tax paid in the prior year urgently.

Sideways Relief: Claiming Against Other Income

Sideways relief (also called "relief against general income") allows you to set off a trading loss against non-trading income and gains for the loss-making period and/or the prior year. This includes:

• Rental income from property.
• Investment income (dividends, interest).
• Gains on the disposal of assets.
• Other miscellaneous income.

Conditions and Limits

Under the current rules (following the 2020 reforms):

• 50% cap: For losses arising in periods starting on or after 1 April 2020, the amount of sideways relief you can claim is capped at the lower of (a) the amount of the loss, or (b) £5 million per year (or 50% of adjusted trading profits, whichever is greater, in the following year and beyond).
• Alternative cap: For groups of companies, there is an even tighter restriction on the total sideways relief available across all group members in a single year.
• Claim requirement: Sideways relief must be claimed in writing; it does not apply automatically.

For the detailed rules and the latest cap thresholds, see the Finance Act 2020 relief guidance on gov.uk.

A Practical Example

Your UK trading company reports a loss of £200,000 in Year 1. It also holds a rental property that generates £120,000 of annual rental profit. You can claim sideways relief to set off up to £5 million of the loss against the rental profit. In this case, the full £120,000 of rental profit can be sheltered. The remaining £80,000 loss can be carried forward or back.

When to Claim Sideways Relief

Sideways relief is most useful when:

• Your company has significant non-trading income (e.g., property or investments).
• You want to accelerate tax relief without waiting for future trading profits.
• You are in the early years of a loss-making venture and expect significant future profit.
• You want to manage your overall corporation tax rate across multiple income sources.

Loss Carry-Back Under the 2020 Reforms

Since 1 April 2020, there have been important changes to loss carry-back:

• Extended period: For losses arising in the loss-making period starting 1 April 2020 onwards (and ending before 1 April 2021), an extended carry-back of up to 3 years was available, but this has since expired.
• Standard 12-month carry-back: For losses in later periods, the standard 12-month carry-back applies.
• Sequencing: If you use both carry-back and sideways relief, HMRC has specific rules on the order in which relief must be claimed and claimed. Broadly, you must carry back trading profit relief before claiming sideways relief.

Always check the latest HMRC loss relief guidance to confirm which extended or enhanced provisions (if any) apply to your loss-making period.

How to Claim and Timing Considerations

Filing and Deadlines

• Carry-back must be claimed in a written notice to HMRC within 12 months of the end of the loss-making period (extendable by HMRC).
• Carry-forward requires no claim; it is applied automatically when you file your corporation tax return.
• Sideways relief must be claimed in writing, typically within the same 12-month window as carry-back.
• All claims should be made via your Company Tax Return (CT600) or by notice to HMRC; your accountant or tax adviser will normally submit these on your behalf.

Order of Claim

If you wish to use multiple forms of relief, HMRC allows you to elect which to claim and in what order. However, for losses arising after certain dates, there are restrictions:

• Generally, trading carry-back must be exhausted before sideways relief is claimed.
• Any remaining loss can then be carried forward to offset future trading profit.

Your tax adviser should model different scenarios to show which sequence gives the best net present value of tax savings.

Documentation and Compliance

Keep comprehensive records:

• Detailed profit and loss accounts showing how the loss arose.
• Evidence of all disallowed expenses and non-trading income.
• Copies of any notice to HMRC claiming carry-back or sideways relief.
• Correspondence with HMRC confirming acceptance of your claim.

This is especially important if HMRC queries your loss claim during an enquiry.

Key Strategic Considerations

Group Relief (a Brief Note)

If your company is part of a wider group, you may also be able to claim group relief, which allows one group company to surrender its loss to another profitable group company in the same period. This can be faster and more flexible than individual loss carry-back. Group relief is a separate mechanism and requires group relief claim forms to be filed. Detailed rules are beyond this article, but speak to your adviser if this applies to you.

Interaction with Other Reliefs

Losses may also be used to:

• Offset chargeable gains (subject to same-period restrictions and caps).
• Contribute to loss-making period relief (if applicable).
• Be surrendered upwards to a parent company (if relief under group relief rules).

Always model the interaction of these reliefs to avoid missing opportunities.

Changes in Ownership

If your company is acquired or undergoes a change in control, strict rules limit the carry-forward and use of pre-acquisition losses. Broadly, losses cannot be carried forward if there is a change in ownership and a significant change in the company's business. This is a complex area; if you are planning a sale, acquisition, or restructuring, consult your adviser early.

Practical Action Checklist

• Step 1: Confirm your trading loss by reference to the detailed accounting records and the corporation tax return.
• Step 2: Identify all non-trading income or gains in the same period and the prior period.
• Step 3: Calculate the total loss and any cap on sideways relief (£5 million or 50% rule).
• Step 4: Model three scenarios: (a) carry-back only, (b) sideways relief only, (c) combination, and determine the net present value of tax savings for each.
• Step 5: Discuss timing with your accountant or tax adviser; for example, if you expect higher profits next year, delaying carry-back might make sense.
• Step 6: File the appropriate claims (usually on your CT600 or by notice to HMRC) within 12 months of the loss-making period end.
• Step 7: Keep copies of all correspondence and retain detailed records for HMRC enquiries.

When to Seek Professional Advice

Loss relief rules are intricate, and the "best" choice depends on your specific circumstances:

• If your loss is large (more than £100,000) or you have multiple income streams, professional modelling is worthwhile.
• If you are a group company, or planning a corporate restructuring, speak to a tax adviser before filing your return.
• If you have received an HMRC enquiry into a loss claim, respond promptly with professional support.

Summary

UK company trading losses are a valuable tax asset. You have three main relief channels:

1. Carry-forward: Offset future trading profits with no time limit (automatic, no refund until profits return).

2. Carry-back: Offset prior-year trading profits and claim a refund (elective, limited to 12 months prior).

3. Sideways relief: Offset other income and gains in the loss year or prior year (elective, subject to £5 million annual cap).

Each has different timing, claim procedures, and tax-planning advantages. Modelling all three scenarios—or discussing them with a qualified tax professional—typically saves far more in corporation tax than the cost of advice.

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Ready to optimise your loss relief claim? Every trading loss is unique, and the correct relief strategy can save substantial tax. Book a consultation with one of our licensed tax advisers today. We will review your accounts, model your relief options, and file your claim to ensure you receive every pound of relief due.