Carried-forward losses restriction

By Tolley
  • (Updated for Budget 2020)

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 arerestricted 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.

Draft Finance Bill 2020 legislation , published on 11 July 2019, provides that the use of carried-forward capital losses will be restricted in a similar way to income losses for accounting periods beginning on or after 1 April 2020, with transitional rules for periods straddling that date. The £5 million deductions allowance currently available for income losses will be shared with the capital loss restriction, with the proportion of the allowance that is attributed to the use of carried-forward capital losses referred to as the ‘capital gains deduction 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 50% where they exceed the capital gains deductions allowance.

It was confirmed in Spring Budget 2020 that certain companies in liquidation will be excluded from the scope of the restriction. Updated draft legislation is expected to be published on 19 March 2020. 

Spring Budget 2020 Overview of Tax Legislation and Rates , para 1.14

The steps for computing the restriction for corporate income losses in CTA 2010, Part 7ZA will be amended to facilitate the capital loss restriction and enable the sharing of the £5 million deductions allowance. Essentially, a company’s profits will be split between income losses and chargeable gains, and the deductions allowance will be allocated to each to arrive at relevant profits to which the 50

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