Knowledge of how the tax relief rules work for corporate losses will add considerable value to an adviser’s proposition
Financial planning tends to focus on situations where there is available capital or income – very possibly created from business profits for SME owner-managers. But sometimes businesses make losses, and an awareness of how the tax rules work for those should be an important part of advisers’ know-how.
HM Revenue & Customs has said it will introduce amendments in the 2018-19 Finance Bill to correct defects in its April 2017 reforms to loss relief and to ensure the legislation works as intended.
The amendments that will be most relevant to SME company clients are as follows:
- The deductions allowance that can be used by a company that is a member of a group will be restricted so that, where that company is a member of one group and an “ultimate parent” of another, it can only use a share of the allowance from the group of which it is a member. This applies in relation to accounting periods beginning on or after 6 July 2018 (and to amounts falling due after 6 July 2018 where an accounting period straddles 6 July 2018) and will prevent groups from acquiring new members to boost the deductions allowance available.
- The terminal loss relief rules will be amended to ensure that, where the three-year time frame for which relief is due starts part way through an accounting period, the total relief due for that accounting period is restricted to the proportion of the total profits for the accounting period that falls within that three-year time frame. This will apply to accounting periods beginning on or after
1 April 2019.
On their own, these changes may not mean that much, but they are important in the context of HMRC’s updated guidance on changes to loss relief for corporation tax.
To remind you, a company can claim relief for a loss from trading, the sale or disposal of a capital asset or on property income, provided it would normally be liable to pay corporation tax. Relief is obtained by offsetting the loss against other gains or profits in the same accounting period, or a claim can be made to carry the loss back. Any remaining loss will be carried forward to future accounting periods.
Let’s have a look at how this works.
Carrying a trading loss forward
Trading losses that have not been used in any other way can be offset against profits in future accounting periods, so long as the trade continues.
Relief for carried-forward losses changed from 1 April 2017.
For losses made in accounting periods ending before 1 April 2017, trading losses are carried forward and set against profits of the same trade of the next accounting period.
As the table to the right shows, the way trading losses are set off for accounting periods from 1 April 2017 depends on when they arise.
For accounting periods that begin before, and end after, 1 April 2017, the profits and losses of the periods are apportioned on a just and reasonable basis. Profits and losses arising before 31 March 2017 are treated as arising in a separate accounting period ending on that date, and those from 1 April 2017 are treated as arising in a separate accounting period beginning on that date.
Carrying a trading loss back
Instead of carrying a loss forward, it is possible to claim for the loss to be offset against profits for the earlier 12-month period (not accounting period). The company must have been carrying on the same trade at some point in the accounting period or periods that fall in the earlier 12-month period.
The company can make a claim to carry back a trading loss when it submits its company tax return for the period when it made the loss. It can also make a claim in a letter to HMRC. Any claim should be made within two years of the end of the accounting period when the company made the loss.
Because of a £40,000 employer pension contribution on 31 December 2017, Magnus Ltd made a loss of £40,000 in the accounting period 1 January 2017 to 31 December 2017. The company made a profit of £30,000 in the previous 12 months.
Magnus Ltd can carry back £30,000 of its loss to be set off against the profit of its previous accounting year, reducing it from £30,000 to £0. It must make a claim for this by 31 December 2019.
The balance of the loss of £10,000 cannot be carried back, so it is available to be carried forward to the year ended 31 December 2018.
So, Magnus Ltd’s £40,000 pension contribution made on 31 December 2017 is being relieved as £30,000 against year ended 31 December 2016 profits, and £10,000 against year ended 31 December 2018 profits. A carry-back loss claim results in corporation tax already paid (potentially at a higher rate) being refunded or set off against tax otherwise due.
Note that, as the £10,000 carried forward loss arose in an accounting period that began before, and ended after, 1 April 2017, it has to be apportioned as follows:
- Pre-1 April 2017 loss: £10,000 x 3/12 = £2,500
- Post-31 March 2017 loss: £10,000 x 9/12 = £,7500
The £2,500 loss is carried forward and set against profits of the same trade of the accounting period ended 31 December 2018.
The £7,500 loss is carried forward and set against total profits (wider than trading profits and including chargeable gains) of the accounting period ended 31 December 2018.
The company needs to make a claim within two years of the end of the accounting period in which the losses are to be set off – so, by 31 December 2020.
Terminal trading losses
If a company stops trading it may be able to claim terminal loss relief. Terminal loss relief allows a company to carry back any trading losses that occur in the final 12 months of a trade and set them off against profits made in any or all of the three years up to the period when it made the loss.
Having considered trading losses, how about capital losses? Losses made when a company sells or disposes of a capital asset are treated differently from trading losses and cannot be offset against trading income. Any capital losses that accrue in an accounting period are to be set against chargeable gains arising in the same accounting period. To the extent they are not utilised in this way, capital losses of an accounting period are carried forward to be set against chargeable gains of future accounting periods. Allowable capital losses are set off automatically.
Profits and losses (deficits) on a company’s interest-based investments and investment bonds not accounted for under the historic cost basis are generally chargeable to, or relievable from, corporation tax under the loan relationships regime as the profits and losses arise.
The basic rule is that non-trading deficits (for example, where the company holds a loan relationship for investment or other non-trade purposes) can be:
- Surrendered as group relief; or
- Set off against any profits of the deficit period; or
- Set off against non-trading credits (loan relationship profits) arising in the previous 12 months before the deficit period.
Any balance, for losses arising before 1 April 2017, is carried forward and set against non-trading profits (for example, against chargeable gains, property income, miscellaneous income, as well as profits of loan relationships and derivative contracts) in succeeding accounting periods. For losses arising from 1 April 2017, any balance can be carried forward against total profits or against total profits of a group company.
Any carry-forward losses for set off against profits arising on or after 1 April 2017 are restricted where profits exceed £5m.
Tony Wickenden is joint managing director of Technical Connection. You can find him tweeting @tecconn
|Carrying a trading loss forward…|
|Losses that arise up to 31 March 2017||
Losses that arise from 1 April 2017
|The loss is carried forward and set against profits of the same trade of the next accounting period.||In most cases the carried-forward loss can be set against total profits of the company or, in certain circumstances, against total profits of a group company, provided the company continues to trade.|
|No claim is needed and the set-off is done automatically. However, if the company does not want the loss set off against profits of the next accounting period, it can make a claim for it to be carried forward and set against trading profits of the following period instead. This claim must be made within two years of the end of the accounting period for which no relief is to be given and should normally be made on the company tax return.||
The company needs to make a claim within two years of the end of the accounting period in which the losses are to be set off. The claim should normally be made on the company tax return.
|The amount of carried-forward trading losses that can be relieved against trading profits of accounting periods from 1 April 2017 is restricted to, broadly, the amount of an allowance up to £5m, plus 50 per cent of the remaining trading profits after deduction of the allowance.||The overall amount of carried-forward losses that can be relieved against total profits of accounting periods from 1 April 2017 is restricted to, broadly, the amount of an allowance up to £5m, plus 50 per cent of remaining total profits after deduction of the allowance. (This overall limit also applies to trading losses arising before 1 April 2017).|