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January 29th 2020

Corporation tax loss relief - options for relieving trading losses

If your company makes a trading loss (as calculated under the tax rules), there are various ways that it can get relief.

Understanding the options available helps business owners to plan ahead and make better financial decisions.

The main ways are described below.

1 Relief against other income and gains of the same accounting period

A trading loss can be relieved against other income and gains arising in the same accounting period, usually without limit. For example, if a company has significant investment income, or a chargeable gain resulting from the disposal of an asset, a trading loss can be offset in order to reduce the total profit on which corporation tax is charged.

2 Relief against income and gains arising in the 12 months prior to the accounting period

Provided the trade giving rise to the loss was undertaken in the preceding period, losses that cannot be relieved against other income and gains of the same period may be “carried back” and relieved against income and gains arising in the previous 12 months.

If the company paid corporation tax on profits and gains arising in the preceding period, a loss carry back claim can therefore result in a repayment of tax from HMRC.

3 Group relief against income and gains of other companies in the same group

If the loss-making company is a member of a group, the trading loss can be “surrendered” to another company (or companies) within the same group, which can then claim relief against its own income and gains.

4 Relief against income and gains arising in the company (or in other companies in the same group) in future accounting periods

Trading losses not relieved in any of the ways specified above are carried forward and may be relieved against future profits. Trading losses which arose prior to 1 April 2017 may only be relieved against future profits arising from the same trade; those arising after that date may also be relieved against other income and gains of the company (or other companies in the same group).

Up to 50% of the future profits arising in any specific period may be relieved under the carry forward rules (though the first £5m of profits arising in any specific period are subject to a “deductions allowance” and may be fully relieved).

Choosing an option

Where a company has more than one option to claim loss relief, the choice usually governed by i) how quickly relief can be obtained and ii) the amount of relief that can be obtained (where the profits being relieved have been, or are likely to be, taxed at different rates of corporation tax).

New developments

Currently, unrelieved capital (as opposed to trading) losses arising within a company may be relieved against chargeable gains arising in the same company in a future accounting period.

Effective from 1 April 2020, capital losses brought forward from prior periods will be subject to the same restriction as trading profits, whereby only 50% of profits and gains in excess of the £5m “deductions allowance” may be relieved under the loss carry forward rules in any one year.

Contact us for further assistance.

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