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Terminal Loss Relief

I have an issue I cannot get my head around regarding Terminal Loss Relief.

A client has an accounting year end of 30 June.

2010/11 Tax Return Form, taxable profits for the period 01.07.09 to 30.06.10 was £22,000

He ceases trading on 31.01.12 and so the final accounts have been drawn up for the 19 month period 01.07.10 to 31.01.12 for the 2012 Tax Return. Taxable loss for this period was £4,000.

There is also unused overlap relief carried forward in sum of £4,000.

How much is able to be carried back and set off against 2010/11 income as terminal loss relief?

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By Triggle
22nd Jan 2013 13:04

The terminal loss is always the loss that has arisen in the 12 months prior to the date of cessation.

It is necessary to time apportion the profits and losses of accounting periods that span that last 12 months.

By convention the calculation splits the last 12 months into two periods:

Period 1: from 12 months before the date of cessation to 5 April before the date of cessation

Period 2: from the 6 April before the date of cessation to the date of cessation

Any overlap profits are added on to the Period 2 calculation.

Thus:

Loss per accounts for the period of 580 days from 1 July 2010 to 31/1/2012 = £4,000

Period 1:

From 1/2/2011 (12mths prior to cessation) to 5 April 2011 (tax year end immediately before date of cessation)

= 64 days/580 days x £(4,000) = £(441)

Period 2:

From 6/4/2011 (tax year end immediately before date of cessation) to 31/1/2012 (date of cessation)

= 301 days/580 x £(4,000) = £(2,076)

Add: overlap profits           = £(4,000)

Total terminal loss:  = £441 + £2,076 +£4,000 = £6,517.

So, profits assessible

2011/2012

based on the accounts for the 19 months to 31/1/2012 £Nil (as there is a loss)

2010/2011 (Revised)

based on the accounts for the 12 months to 31/7/2010

As originally assessed:                        £22,000

Less: Terminal loss carried back           £ 6,517

Revised profits assessible 2010/11        15,483

 

Note: as you had a long period of account for the last period of trading there is no real need to split the result between Period 1 and Period 2 as done above

Period 1 and 2 would simply be:

1/2/2011 to 31/1/2012 = 365 days/580 days x £(4,000) = £2,517

Add: overlap profit                                                      = £4,000

Terminal loss                                                            = £6,517 (as above)

However, it is good practice to split the final 12 months into the two periods as it gets more complicated when, for example, the last period of account is a shortened period.

 

 

 

 

 

 

 

 

 

 

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