What Businesses Need to Understand about Carry Back
Businesses are often faced with challenges. Due to the current economic situation, most ventures are incurring losses instead of revenue. Customers are scarce and limited, the prices for raw materials have skyrocketed, and the marketing of products and services aren’t working like it used to. This isn’t a rare or isolated occurrence either, as many businesses have their ups and downs, and there will always be external factors that may or may not affect a business’ sales!
You may probably be one of the many who are struggling with your current venture. In such a case, you may experience a certain amount of Net Operating Loss (NOL)
“What is Net Operating Loss?”
Net Operating Loss or NOL is the term used to describe negative income.
Basically, if the expenditures of your business are higher than its earnings, then the amount of loss is called the NOL. Take note that just because you are incurring losses in your business doesn’t mean that the Her Majesty Revenue & Customs (HMRC) office would stop taxing you for your income.
Yes, the losses may be higher than the revenues, but the fact is that your business is still earning—no matter how small it may be! This small amount is still taxable.
“What would I do with my NOL?”
When a business incurs an NOL, the HMRC can allow that business to take that loss and utilise it to offset past or future taxable incomes. In such a case, it can carry back the loss to get a refund of the tax that it paid in the past. The business may also choose to carry forward the tax lost to offset any profits in the future.
Keep in mind that you should have a good track record with regards to your past taxes. This means that during the recent years of your business, all of your income taxes must have been fully paid.
“You mentioned ‘Carry Back;’ what does it mean?”
Also known as “Net Operating Loss Carry Back,” it means that the company or business may apply its current losses to its past tax returns. This is what we were referring to when we mentioned that you might be able to get a refund of the taxes you were able to pay in the previous years.
“Up until how many years may I apply for the carry back?”
The HMRC recently stated that you may apply for it up until the three recent years of your venture. So take advantage of this opportunity, especially if your business was doing great in recent years! This only means that your taxable incomes were high, perhaps even high enough to make up for your losses this year.
You may have to keep the tax rate in mind as well, as it would play an integral part in the computation of your Income Tax Refund (ITR). Let’s say that the tax rate is 20%, for example. You’d have to multiply that with the sum of your business’s taxable income in the previous years. That amount would be your ITR.
For non-accounting majors, trying to understand the many facets of taxes may be confusing at first. However, as a business owner, you should at least be familiar with the basics, especially those that involve both your revenues and your losses. Knowing the fundamentals would help you know the next few steps to take in order to get your business up and running again, especially during these challenging times.
If taxes and numbers aren’t a part of your skillset, then we at 1to1 Accountants would be more than happy to assist you. We are experts in the ins and outs of modern accountancy, even with your personal tax affairs. Our accountancy services are well-trusted by our clients—so if you’re looking for accountants in Hillingdon, give us a call today!