Self-employed can free up £1bn in tax clawback

Thousands of small business owners who have lost money during the crisis can claim more than £ 1bn in tax rebates to help mitigate losses.

Businesses can claw back profit and income taxes paid in the past three years after the Government announced an emergency extension to “loss carry back” rules in the Budget at the start of the month.

More than 130,000 incorporated businesses, which can include de facto self-employed company directors with no employees, and more than 500 sole traders or partnerships, should benefit, according to forecasts by HM Revenue & Customs.

Previously, losses could only be carried back one year to offset historical tax bills, but this has been extended to three.

It provides a potential lifeline for businesses facing collapse. Unlike other reliefs that simply cut future tax bills, those carrying losses back can get refunds for tax that has already been paid. The Government has estimated it will pay £840m in refunded taxes this tax year and a further £205m in 2021-22.

Mike Warburton, The Telegraph’s Tax Hacks columnist, said the policy would be welcome news for many after “the toughest 12 months most of us can remember”.

HMRC suggested the numbers benefiting from the relief could ultimately surpass its estimates. A spokesman said: “At this stage, the estimate is uncertain as the number of businesses able to benefit will only be known when tax returns for the relevant years are submitted, but relief will be available to all qualifying businesses.”

Nimesh Shah, of tax firm Blick Rothenberg, said the tax authority’s projections seemed “awfully small” and did not seem to account for the 1.6 million self-employed who did not qualify for income support because of various quirks in the system.

This newspaper has previously reported on the struggles of those excluded from state aid, who have been forced to get by on next to nothing for much of the past 12 months.

“I don’t think the self-employed community would necessarily agree that the level of support has been sufficient to limit losses [to the extent HMRC’s figures suggest],” Mr Shah said.

Chris Etherington, of RSM UK, another tax firm, said it was “important for self-employed workers not to overlook” the extension of the relief, which could be very valuable.

Telegraph Money revealed last week that half of Britain’s self- employed workforce was planning to quit freelancing because of the pressures caused by the pandemic and the spectre of heftier taxation.

Britons are now shouldering the biggest tax burden since the 1960s after Rishi Sunak, the Chancellor, announced a freeze on protections against income, inheritance and capital gains taxes, as well as an increase in the corporation tax rate to 25pc from 19pc by 2023.

At the same time, tax debts have soared as many have not had enough earnings to cover what they owe. Total tax debts at the end of 2020 were more than £ 65bn, according to official figures, up from £19bn at the same point the year before.

About 650,000 people unable to pay their debts have moved their tax bills on to monthly payment plans.