Two significant changes to the treatment of tax losses for corporation tax apply from 1 April 2017, which should make relieving losses easier for small and medium sized companies.
These changes are:
From 1 April 2017, carried forward losses can only be offset against 50% of profits subject to an allowance that allows up to £5 million of profits to be covered by carried forward losses unrestricted.
Carried-forward losses that arose on or after 1 April 2017 can be used more flexibly to be offset total profits of the same company or group company rather than just profits from the same trade.
HMRC has published updated guidance on the use of losses in the 2017/18 version of Company Losses Toolkit.
Accounting for losses
It is important that the accounting records are maintained in sufficient detail and are accurate enough to deal with any sort of corporate loss claim.
There are broadly six categories of tax losses, so income, expenditure, profits and losses must be allocated to the correct category. The six categories of tax losses are:
non-trading loan relationship deficits
losses from a UK property business
non-trade losses on intangible fixed assets and
You need to be able to identify losses that arose on or after 1 April 2017 from those that arose before. Where the accounting period straddles 1 April 2017 it may be necessary to apportion the profits and losses between pre and post 1 April 2017 as separate amounts.
How to allocate losses
The next step is to ensure that any losses arising in the current accounting period are allocated against current year profits. If there are different types of losses they need to offset in the correct order.
The rules of offset are quite complex. For example, trading losses in the year cannot be offset until the following are reliefs have been claimed:
non-trade loan relationship deficits (including those brought forward and offset against non-trading profits)
losses arising from property businesses
However, the trading losses must be offset before:
non-trade loan relationship deficits brought back from a later year
In some instances it may be possible to carry back a loss to the previous accounting period, or to set it against profits of the last three years prior to cessation of trade, in the case of a terminal loss relief claim.
Losses brought forward
Having dealt with current year losses you can consider the allocation of the tax losses brought forward.
Trading losses that arose before 1 April 2017 can only be carried forward and offset against future profits of the same trade.
Losses arising on or after 1 April 2017 can usually be offset against the future total profits of the company. These losses can also generally be carried forward and in future periods surrendered as group relief.
However, in either case the losses are now subject to a possible restriction. The amount of relief is broadly restricted to 50% of the total profits in the accounting period for which the relief is claimed, plus the “deductions allowance” that the company is entitled to.
For a stand-alone company, the amount of the deductions allowance is £5 million for a 12 month accounting period, reduced proportionately where the accounting period is less than a year. Where the company is a member of a group, only one allowance is available for the accounting period but may be allocated amongst group members as they choose.
Most small and medium sized companies won’t be subject to this loss restriction. So for most smaller companies the new rules are to be welcomed.
About David Hadley
David works out of the Mercer & Hole’s London and St Albans offices and is a highly experienced tax professional. He works with a wide range of businesses, ranging from small family companies to large entrepreneurial corporations, as well as charities and not-for-profit organisations.
David provides advice on issues including, Entrepreneurs’ Relief, Substantial Shareholding Exemption and Inheritance Tax (IHT) Business Asset Relief.