03. BPT - Corporation tax losses Flashcards
When does trading losses arise?
When tax adj profit after CA = -ve
Trade income assessment in TC will be NIL
How does a trading loss show on CT?
Trade income assessment in TC will be NIL
i.e. will never be included as -ve
What is the first way that should be considered for loss relief?
CURRENT YEAR AND CARRY BACK 12 MONTHS
Note: no changes were made to this method in 1 April 17 (both before and after loss rules must be considered in this exam)
How does the ‘current year and carry back 12m’ loss relief work?
- Offset against total profits (pre QCD)
- Options are current year only, or current year then carry back 12m
- Claim is required within 2 years of the end of the loss making period
- Partial claims now allowed so QCDs may be wasted
How is the current year and carry back 12m loss relief affected by a short acc period?
Under s37, loss can be carried back 12m
- There will be more than 1 acc period in 12m before start of loss making oeruid
- In this case, relief is carried back on LIFO basis
- profits of acc period that falls partly into carry back period must be time apportioned
How does relief for carry forward of post 1 April 17 trading losses work?
- Unused trading losses can be carried forward and offset against total profits (as long as trade continues and wasn’t small/negligible in previous periods)
- Loss relief NOT automatic. Claim can be made to specify the amount of loss to offset in a year: NOT all or nothing claim
- Make claim within 2 years of end of AP in which loss is relieved
- If trade doesn’t continue on commercial basis in period or relief, or was small/negligible in previous period, then losses can only be used in same was as pre 1 April losses
What must be done if relief for carry forward straddles 1 April 2017?
Loss should be time apportioned and old and new rules should be applied to relevant number of months accordingly
How is carry back loss relief affected if the losses are in the last 12m of trading?
- If a loss arises in last 12m of trade, then carry back period is extending to prevent 36m rather than just 12
- When counting back 36m, start from beginning of acc period in which the relevant part of loss was made
Describe carried forward losses - terminal loss relief
- Trading losses carried forward to period of cessation but to relieved can be carried back 3yrs from end of period of cessation (NOT 3yrs prior to start of AP as with normal terminal loss relief)
- Cfwd loss can be offset against
> TRADING prof if loss arose pre 1 April 17
> TOTAL prof if loss arose post 1 April 17 - Relief only available against periods beginning on/after 1 April 17
- If acc period straddles 1 Apr 17, treated as 2 sep acc periods and prof calc’ed on time-apportioned basis
- Relief only avail in periods after loss making period (i.e.not period of loss or earlier)
- If claim is made, must use as much as poss on LIFO basis. Restriction on relief of cfwd losses doesn’t apply for losses relieved this way
- Claim must be made 2yrs from end of period of cessation
Summarise non-trade losses for Property
Current year: Against total profits
Carry forward (pre 1 Apr 17) : Against total profits
Carry forward (post 1 April 17) : Against total profits
Carry back: NA
Summarise non-trade losses for Capital
Current year: Against gains only
Carry forward (pre 1 Apr 17) : Against gains only
Carry forward (post 1 April 17): Against gains only
Carry back: NA
Summarise non-trade losses for
NTLR
Property
Capital
NTLR
Current year: Against any profits
Carry forward (pre 1 Apr 17) Against non-trade profits
Carry forward (post 1 April 17)Agaist total profits
Carry back: Against NTLR surplus only
Property = against total profits always (but can’t carry back)
Capital = always against gains (but can’t carry back)
What 2 factors influence the choice of loss relief?
TIMING
- CY saves tax now
- PY generates a tax repayment
- CF have to wait for tax saving and future profits are uncertain
AMOUNT
- Avoid wasting QCDs
- Unrelieved QCDs can’t be cfwd against future profits, therefore certain claims for loss relief may lead to relief for QCDs being wasted
How does timing affect the choice of loss relief?
TIMING
- CY saves tax now
- PY generates a tax repayment
- CF have to wait for tax saving and future profits are uncertain
- Comps usually pref to obtain relief ASAP by carrying back. Generates tax repayment and helps cash flow. (But remember comp can only carry back after doing current year claim)
- But must also consider the risk of wasting QCD. S37 relief is done before deduction of QCD (solution is to carry forward after 1 April 17 to avoid wasting)
How does amount affect the choice of loss relief?
AMOUNT
- Avoid wasting QCDs
- Unrelieved QCDs can’t be cfwd against future profits, therefore certain claims for loss relief may lead to relief for QCDs being wasted
How does loss relief affect the payment of corporation tax?
Use of losses could bring profits to below limits of large/very large companies, which would lead to CT liability being due for payment at a later day
When is there a restriction in utilisation of losses?
When there is a change in ownership (CIO) and major change in the nature/conduct of a trade
- within 5 yrs, starting no more than 3 yrs prior to CIO, when looking at the restriction of trading losses
- within 8 yrs, starting 3 yrs before CIO, when looking at restriction of other losses
When companies trade has become small/ negligible and there is CIO after which there is a significant revival of trade
Give some examples of change in nature/conduct of trade
- Services/facilities provided
- Nature of customers
- Assets traded in
- Location of premises (unless moved to increase efficiency)
- Suppliers, management, staff
- Methods of manufacturing
- Pricing or purchasing policies
What are the restrictions on carried forward losses?
What are the restricted losses (i.e. which losses are restricted)
- As of 1 April 17, the amount of profits that can be relieved by bfwd losses listed below is restricted
- Trading losses
- NTLR deficits
- Property losses
- Non-trade IFA losses
- Management expenses
- Restriction won’t affect companies with bfwd losses < £5m
- Max profits relieved in 12m period by bfwd losses is restricted to a deductions allowance of £5m + 50% of profits in excess of this amount
Which companies aren’t affected by restrictions on carried forward losses?
- Restriction won’t affect companies with bfwd losses < £5m
Egg Ltd trading profit is £8.5m for ye 31 March 2021. It has trading losses bfwd of £9.23m
No related 51% group companies and no other income/losses in yr
Calc Eggs TTP for ye 31 March 21 and what losses can be carried forward to subsequent periods
As they are standalone company, has access to full £5m deductions allowance
Max losses that can be offset in ye 31 Mar 2021 calc’ed as:
£5m + 50% * (£8.5m - £5m) = £6.75m
This leaves losses that Egg can carry forward to subsequent acc of
£9.23m - £6.75m = £2.48m
How can capital losses be restricted?
- As of 1 April 20, the £5m deductions allowance was extended to apply to bfwd cap losses as well as income losses
- CY capital losses will cont to be offset in full as restriction only applied to use of bfwd cap losses against net chargeable gains (i.e. CY gains less CY losses)
- Acc period straddling 1 April 20 is split into 2 notional sub-periods
> Gains/losses falling in each sub-period are automatically netted off
> If an overall losses arises in 1 sub-period, that loss can offset against gain in other sub-period without having to consider any restriction (i.e. treated as CY gain)
> Any bwd losses are then considered. These can be offset without restriction against the net gains in sub-period ended 31 Mar 20. Restriction applies to any offset in sub-period starting 1 April 20
How is the deductions allowance on restricted losses carried forward?
- Company can specify the amount of its deductions allowance (if any) to be allocated between trading profits, non-trade profits and net chargeable gains
- Excess profits figure is based on profits you will relieve the loss against (e.g. pre 1 April 17 loss is used against trading profit so 50% of trading profs would be used)
How is the max profit to be relieved by bfwd losses calculated for
Trading profit
Non-trading profit Net chargeable gains
Total profits ?
Trading profit = £5m (or part thereof if some allocated to non-trading profits or net chargeable gain) + 50% excess trading profits over £5m
Non-trading profit = £5m (or part thereof if some allocated to trading/ net chargeable gains) + 50% excess non-trading profits over £5m.
Note: non-trade profit includes net gains for the year
Net chargeable gains = £5m (or part thereof if some allocated to trading/ non-trade income) + 50% excess net chargeable gains over £5m
Total profits = £5m + 50% excess total profits over £5m
