Chapter 3 Corporation tax losses Flashcards
1.1 Trading losses
Current year losses can be claimed in the accounting period of the loss against total profits. No partial claim available. Carry back can be in the 12 months from the start of the period of loss against total profits. No partial claim is available. Carry forward occurs in periods following the loss against total profits. A partial claim is available, restrict to protect qualifying charitable donations.
1.2 Short accounting periods prior to year of loss
Under s37 the normal carry back loss for trading losses is 12 months. Relief is carried back on a LIFO basis (later accounting periods before earlier accounting periods). The profits of the accounting period that falls partly into the carry back period must be time apportioned.
1.3 Temporary extension to carry back.
Loss making periods ending between 1 April 2020 and 31 March 2022 an extension to the usual carry back is available for trading losses. These losses can be carried back 36 months in total, on a LIFO basis against total profits. This can only be claimed after a current year claim has been made. A cap applies to extended carry back, the cap is:
- £2 million for loss-making periods ending between 1 April 2020 and 31 March 2021, and
- A further £2 million for loss-making periods ending between 1 April 2021 and 31 March 2022
1.4 losses in the last 12 months of trading
If a loss arises in the last 12 months, under s37 the carry back period is extended to the preceding 36 months rather than the preceding 12. When counting back, start from the beginning of the accounting period in which the relevant part of the loss was made. Losses carried back under terminal loss relief are not subject to the £2 million for extended carry back.
1.4 Carried forward losses – terminal loss relief.
Due to restriction on the use of brought forward losses a company may have losses that are carried forward of cessation of trade. Trading losses carried forward to period of cessation can be carried back three years from the end of the period of cessation. The carried forward loss can be offset against total profits. If only part of an accounting period falls within the three=year period, then available profits for relief are time apportioned. Relief is only available in periods after the loss-making period. Relived on a LIFO basis, the claim must be made within two years from the end of the period of cessation.
2.1 Other losses
NTLR losses can be set against profits in the current year, can be carried back against NTLR surplus only and can be carried forward against total profits.
Property losses can be set against total profits in the current year, cannot be carried back and can be carried forward against total profits.
Capital losses can be set against gains only in the current year and carried forward against gains only. They cannot be carried back.
2.2 Share loss relief
If an investment company makes a capital loss on disposal of shares in a qualifying trading company that may be offset against:
- Total profits in the accounting period of the loss and
- Total profits of an accounting period ending in the 12 months before the loss-making period
The selling company must be an investment company for a six-year period and must have subscribed for the shares as new. A qualifying trading company is a UK resident unquoted trading company.
3.1 Choice of loss relief
Factors that influence choice include timing (CY saves tax now, PY generates a tax repayment and c/f you have to wait for tax saving and future profits which may be uncertain) and the amount (avoid wasting QCDs, unrelieved QCDs cannot be carried forward or back and the rates of tax are increasing).
3.2 Timing
Carry back us usually seen as better a timing perspective than carry forward as this will generate tax repayments and help cash flow problems. But you can only carry back losses after a current period claim. So, you must consider wasting QCDs as current or prior period offsets are made before the deductions of QCDs.
Companies electing to carry forward losses must wait for the benefit. However, when offsetting losses carried forward a partial claim can be made to avoid QCDs.
3.3 Tax savings
The rate of corporation has been 19% since FY2017, may increase in the future (25% but not in textbook). Companies expecting to make large profits may prefer to carry forward losses to benefit from a greater tax savings. This should be weighed against the cash flow implications of having a delay in receiving this saving.
3.4 Payment of corporation tax
If a company has augmented profits greater than £1.5m they must pay tax through instalments. If greater than £20m then instalment dates are brought forward. Use of losses could bring profits below these limits, which would lead to the CT liability being due for payment at a later date.
4.1 Change in ownership
Restriction on utilisation of losses where on or after 1 April 2017, there is a change of ownership and a major change in nature or conduct of trade:
- Within 5 years, starting no more than three years prior to the change in ownership, when looking at the restriction of trading losses, or
- Within eight years, starting three years before the change in ownership, when looking at the restriction of other losses
Restriction on utilisation of losses, where after the company’s trading activities have become small or negligible, there is a change in ownership after which there is a significant revival of the trade.
Examples include changes in:
- Services/facilities provided.
- Nature of customers
- Assets traded in
- Location of premises (does not include moves to increase efficiency)
- Suppliers, management, staff
- Method of manufacturing
- Pricing or purchasing policies.
4.2 Restrictions on loss
Where the above applies, trading losses cannot be carried forward/back past the date of the change in ownership. The restriction also applies to brought forward property business losses, NTLR deficits, non-trading intangible fixed asset losses and unused expenses of management for companies with investment business.
5.1 Restriction on carried forward losses.
The amount of profits that can be relieved by the brought forward losses listed below is restricted: trading losses, NTLR deficits, property losses, management expenses and capital losses. The restriction does not impact companies with brought forward losses less than £5 million. The maximum amount of profits relieved in a 12-month period by brought forward losses is restricted to a deductions allowance of £5 million, plus 50% of profits in excess of this amount.
