Corporation tax losses are available to limited companies as a form of tax relief by offsetting any loss you make in a given accounting period against your other gains or profits of your business in the same accounting period. You can also choose to carry the loss back to previous accounting periods, and if you do not, the losses can be carried forward to another accounting period.
Corporation tax losses are an important tax relief to limited companies who are keen to reduce their tax liabilities during their growth phase.
From 1 April 2017 the rules around capital losses were relaxed to the benefit of limited companies. The changes mean that:
- Trade losses can be carried forward against total profits, and not just profits of the same trade
- Non-trading loan relationship deficits (NTLRDs) can be carried forward against total profits, and not just non-trading profits.
- Certain carried forward losses may be available for group relief, including trading losses, non-trading losses on intangible fixed assets, management expenses, NTLRDs and property business losses.
The application of the updated rules means that if your limited company had no carried forward losses as at 31 March 2017, then any losses incurred after this date can in potentially be relieved against total profits not just trade profits, subject to certain restrictions, as outlined below:
- You must continue to carry on trade in all accounting periods following the relief claim up to and including the one in which the losses are offset
- The trade must not have become small or negligible in the period of loss
- The trade must be commercial or carried on for statutory functions in both the loss making period and period of set off.
If these conditions are not met, you may still be able to carry forward losses under the old loss relief rules, or if you have ceased trading, it may be possible to claim terminal loss relief. Either way, you do have options to claim tax relief, and we recommend you speak to a tax and accounting expert, like Southside Accounting, to make sure you are making the most of the reliefs available to you.
There are also a number of terms and conditions around group relief for carried forward losses, including:
- You can only surrender carried forward losses as group relief if it cannot be deducted from your own profits in the accounting period.
- You cannot claim carried forward losses as group relief if it has its own carried forward losses which it could set off.
How it works in practice
If a company had losses carried forward at 31 March 2017 these will continue to fall under the old loss relief rules, and will therefore have to be tracked separately to any later losses.
Where a company has an accounting period which straddles 1 April 2017 then the periods falling before and after that date are treated as two separate accounting periods. Special rules apply in these circumstances which we can help guide you through, ensuring you are following HMRC rules to the letter.
Please also be aware that there are changes in the way claims for carried forward losses operate under the new rules, including:
- If trade losses are carried forward against profits of the same trade (typically because they are pre-April 2017 losses) then relief is automatic, but you can make a claim to stop this.
- Where carried forward losses are set against total profits, the company must make a claim for the relief.
It should be noted that, although the restriction on the set off of carried forward losses will only affect the largest companies, new compliance rules require all companies to specify the amount of their annual deduction in their corporation tax return and groups to nominate the member responsible for allocating the deduction.
We can help
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We always offer an initial free face to face meeting with prospective clients, so we can get to know you and your business and understand your unique circumstances and business goals.
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Written by Shaima Todd.