Carried-forward losses restriction

Produced by Tolley

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
  • 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’
  • Step 3 ― separate modified profits into different pools
  • More...

Carried-forward losses restriction

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.

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 is to restrict the amount of chargeable gains that can be relieved with carried-forward losses to 50% where they exceed the chargeable gains deductions allowance. There is no change to the basic rule that capital losses can only shelter capital gains.

The steps for computing the restriction for corporate income losses in CTA 2010, s 269ZA–269ZZB (Part 7ZA) were amended to facilitate the corporate capital loss restriction and to enable the sharing of the £5 million deductions allowance.

Essentially, a company’s profits must be split between trading profits, non-trading income profits and chargeable gains, and the deductions allowance allocated to each to arrive at relevant profits to which the 50% cap is then applied. Consequently, a restriction on the use of carried-forward income and capital losses will

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