Carried-forward losses restriction

Produced by Tolley
Carried-forward losses restriction

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

  • Carried-forward losses restriction
  • Overview of the carried-forward loss restriction
  • Transitional rules on corporate income losses ― periods straddling 1 April 2017
  • Extension of the restriction to capital losses from 1 April 2020
  • Transitional rules on corporate capital losses ― periods straddling 1 April 2020
  • Losses unaffected by the restriction
  • Exempt losses
  • Calculation of the carried-forward losses restriction
  • Step 1 ― calculate modified total profits
  • Step 2 ― determine any ‘in-year reliefs’
  • More...

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 (known as the deductions allowance), 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 income losses carried forward from periods before 1 April 2017.

HMRC guidance can be found at CTM05010 onwards.

Transitional rules on corporate income losses ― 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.

For an overview of the corporate interest restriction regime, see the Corporate interest restriction ― overview guidance note.

Extension of the restriction to capital losses from 1 April 2020

For accounting periods beginning on or after 1 April 2020, with transitional rules (see below) for periods straddling that date, the use of carried-forward capital losses is restricted, in a similar way to income losses. From this date, the £5 million deductions allowance must be shared between income and capital losses, with the proportion of the allowance that is attributed to the use of carried-forward capital losses referred to as the ‘chargeable gains deductions allowance’. The effect of the capital loss restriction will be to restrict the amount of chargeable gains that can be relieved with carried-forward losses to

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