Corporate capital losses in a nutshell
A company will typically make a capital loss when it sells a capital asset for less than it paid for it. Such losses are deducted from any chargeable gains which the company has for the same accounting period. If there are insufficient gains to make use of all or part of a loss in this way, the remainder is carried forward for set off against gains of future periods. In some circumstances, however, relief for losses may be restricted, or denied under anti-avoidance legislation.
When does a capital loss arise?
A company makes a capital loss (referred to in the legislation as an ‘allowable loss’) if it disposes of a chargeable asset and the proceeds are less than the allowable costs. A loss may also arise where there is no actual disposal of an asset but the legislation deems there to be a disposal, for example where an asset is destroyed or becomes of negligible value. Indexation allowance up to December 2017 cannot be used to increase or create an allowable loss. Therefore, if an allowable loss has arisen before the deduction of indexation allowance, this amount will be the final allowable loss. If a loss arises only after the deduction of indexation allowance this is not an allowable loss. Instead the company is deemed to have made no gain or loss on the disposal of the asset.
Which losses are excluded?
An allowable loss can only arise on a disposal if, had a gain arisen on the disposal, that gain would have been a chargeable gain. Consequently, a loss arising in circumstances in which the substantial shareholding exemption would have applied to a gain is not an allowable loss.
Losses on disposal of assets within the intangible fixed asset rules are dealt with under those rules; they are not allowable losses under the capital gains rules.
What relief is available for a capital loss?
Any allowable losses that arise in an accounting period may be offset against chargeable gains that accrue in the same period. Losses that cannot be utilised in this way are carried forward to be offset against future chargeable gains. Losses arising in the same accounting period are offset before losses brought forward.
Allowable losses cannot normally be set off against income of the company. There is an exception for losses arising on the disposal by an investment company of shares in a qualifying trading company where the company originally subscribed for the shares.
There is no provision for allowable losses to be carried back for set off against chargeable gains of earlier accounting periods. Again, there is a very limited exception to this rule that applies only to non-resident companies which are chargeable to corporation tax only because of the disposal of assets.
Are there any restrictions on relief for losses?
A loss on a disposal to a connected person is deductible only from chargeable gains arising on disposals to that same person while they are still connected. Such losses are often referred to as ‘clogged losses’.
From April 2020 relief for carried-forward losses may be restricted in a similar way to income losses. An annual £5 million deductions allowance must be shared between income and capital losses in proportions chosen by the company. The effect of the capital loss restriction is to restrict the amount of chargeable gains that can be relieved with carried-forward losses to 50% where they exceed the part of the deductions allowance allocated to chargeable gains.
What special rules apply to companies which are members of a group?
Transfers of assets between members of a capital gains group result in no gain/ no loss tax position so no allowable loss will arise.
Companies in the same gains group can jointly elect for a gain or loss arising to one group company to be transferred to another group company. The election can only be made if the no-gain / no-loss transfer rule would have applied had there been a transfer of the asset between the companies making the election. This rule allows gains and losses to be brought together within one group company so that the loss can be offset against the gain.
There are restrictions on the use of allowable losses arising before a company joins a group. These are referred to as ‘pre-entry losses’ and can be set off only against certain types of gain, broadly gains on assets owned by the company at the time it joined the group or on assets used for the purposes of a continuing trade or business that the company carried on at that time.
Are there anti-avoidance rules?
There are a number of targeted anti-avoidance rules which can restrict or deny relief for a capital loss. In particular, a loss arising from arrangements with a main purpose of securing a tax advantage is not an allowable loss. HMRC can issue a notice to a company to the effect that a loss cannot be relieved against a gain arising from certain avoidance schemes. From April 2020 capital losses have also been brought within the provisions which counteract loss-related tax advantages arising from ‘tax arrangements’.
Are there specific anti-avoidance rules applicable to groups?
There are also anti-avoidance rules which apply specifically to companies in groups. These include rules to prevent loss buying and gain buying and the restriction of losses on the disposal of shares or securities following a depreciatory transaction within the group.
What are the notification requirements?
For a capital loss to be treated as an allowable loss which can be set off against gains, the company must notify the loss to HMRC. This will usually be done in the company’s tax return for the accounting period of the loss but must in any event be done within four years of the end of that accounting period.