Trading losses of companies are computed in the same way as trading profits. Relief for the loss can be obtained by set-off against other profits. This can be by way of a claim to set the loss against total profits of the same accounting period or, if the loss exceeds those profits, against total profits of the previous twelve months. Alternatively, the loss, or the remaining loss, can be carried forward to future accounting periods for set off against future profits. If the company is a member of a group, a loss can be surrendered to another company in the group for set off against their profits, either in the same period or in a subsequent period.
When does a trading loss arise?
Trading losses of companies are computed in the same way as trading profits. They must be calculated in accordance with generally accepted accounting practice (GAAP), subject to any adjustments required or authorised by law. The starting point for calculating trading profits or losses is therefore usually the profit or loss before tax figure as per the accounts, which is then subject to tax adjustments where applicable. Where the adjusted trading result figure is a loss, the trade profit amount in the corporation tax computation will be nil.
How is relief for a trading loss given in the same accounting period?
Trading losses can be offset against total profits of the same period. Total profits include, for example, chargeable gains or property business profits. No partial claims are allowed and the claim must either use all of the loss, or eliminate all of the available profits. The company must carry on the trade on a commercial basis and with a view to making a profit. The claim must be made within two years from the end of the accounting period in which the loss was incurred.
How is relief for a trading loss given in an earlier accounting period?
Trading losses may be carried back for relief against total profits of the previous 12 months. This claim may only be made once a current year claim has been made and an excess of losses remains or where there were no current year profits.
How is relief for a trading loss given in subsequent accounting periods?
If a loss has not been relieved in another way, a company can generally carry it (or the balance remaining after other claims) forward to the next accounting period for relief against total profits. The company must continue to carry on the trade in which the loss arose in the period in which it is used and there are further conditions to be met. A claim must be made within two years of the end of the period in which the loss is used. The claim can be for all the available amount or only part of it. Different rules apply to losses which arose before 1 April 2017.
Are there restrictions on the use of carried-forward losses?
Relief for carried-forward losses may be restricted. An annual £5 million deductions allowance must be shared between income and capital losses in proportions chosen by the company. The effect of the loss restriction is to restrict the amount of profits that can be relieved with carried-forward losses to 50% where they exceed the deductions allowance. The rules involve complex calculations and apply with effect from 1 April 2017.
What additional reliefs are available when the company stops trading?
Trading losses incurred by a company in the final 12 months leading up to the discontinuance of trade may be carried back for up to three years from the period beginning immediately before that 12-month period. This is often referred to a ‘terminal loss relief’. It is likely that this will involve an apportionment of losses incurred in the penultimate accounting period because cessation accounts are not always exactly 12 months long. Where the carry-back claim is made against profits of more than one accounting period, losses must be offset against later years first. Claims must be made within two years of the end of the period in which the loss was incurred.
Terminal loss relief is augmented by an additional relief for carried-forward losses incurred on or after 1 April 2017. Such losses can be carried back for up to three years from the end of the terminal accounting period. Claims must be made within two years after the terminal period.
What reliefs are available to companies which are members of a group?
As an alternative to the above reliefs, companies which are members of a75% group can surrender trade losses as group relief for set off against the profits of other group members. The company is not required to set off trading losses against its own profits before surrendering them as group relief. For losses arising on or after 1 April 2017, a company may also surrender trading losses brought forward under the group relief for carried-forward losses rules.
Where a trade is transferred between companies under common 75% ownership, trading losses of the trade can also be transferred into the successor company. This is subject to restriction if the liabilities of the predecessor company which are not transferred exceed the value of the assets not transferred plus the transfer consideration.
Are there anti-avoidance rules?
There are several anti-avoidance rules which apply to restrict or deny the set-off of trading losses. They include restrictions where there is both a change in ownership of a company and a major change in the nature or conduct of its trade within a five-year period. A trading loss incurred in an accounting period beginning before the change in ownership may not be relieved against profits of an accounting period ending after the change of ownership. Similarly, a loss incurred in an accounting period ending after the change of ownership may not be relieved against profits of an accounting period beginning before the change in ownership.
There is also a ‘targeted anti-avoidance rule’ (TAAR) for corporate losses which applies where there is an arrangement with a main purpose to obtain a loss-related tax advantage and it is reasonable to regard the arrangements as circumventing the intended limits of relief under the relevant loss provisions or they otherwise exploit shortcomings in these provision.