Carried-forward losses restriction

By Tolley
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The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Carried-forward losses restriction
  • Overview of the carried-forward loss restriction
  • Calculation of the carried-forward losses restriction
  • Step 1 ― calculate modified total profits
  • Step 2 ― separate into trade profits and non-trade profits
  • Step 3 ― calculate qualifying trading profits and qualifying non-trading profits
  • Step 4 ― allocation of £5m deductions allowance
  • Step 5 ― application of 50% limitation
  • Interaction with losses carried back
  • Carried-forward loss restriction administration

Overview of the carried-forward loss restriction

An important restriction in the use of losses carried forward was introduced by Finance (No 2) Act 2017. Subject to a de minimis of £5m, most carried-forward losses are restricted to a set-off which is limited to 50% of profits.

The rules restricting losses apply to accounting periods beginning on or after 1 April 2017, but with straddling provisions as discussed below. It is important to note that the 50% restriction also applies to trading and certain other losses carried forward from periods before 1 April 2017.

HMRC guidance can be found at CTM05010 onwards.

Accounting periods straddling 1 April 2017

Where a company’s accounting period straddles 1 April 2017, the periods before and after 1 April 2017 are treated as two separate accounting periods, and profits / losses are time apportioned or, where that would produce an unreasonable result, apportioned on a just and reasonable basis. Special commencement provisions apply where the company is also subject to the corporate interest restriction rules in TIOPA 2010, ss 372–498 (Part 10). Worked examples relating to these complexities are included in the HMRC guidance referred to above.

F(No 2)A 2017, Sch 4, Part 12, paras 190–192

For an overview of the corporate interest restriction regime, see the Introduction to the corporate interest restriction guidance note.

Losses unaffected by the restriction

It is important to appreciate that the restriction only impacts carried-forward losses and does not affect loss relief in the following scenarios:

  • current year loss reliefs of any description
  • carry-back of trade losses, including pre-1 April 2017 terminal losses
  • new style terminal losses carried back under CTA 2010, s 45F
  • excess capital allowances

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