Corporation Tax trading losses
This blog provides an overview of the rules regarding corporation tax trading losses and is based on information obtained from the HMRC website https://www.gov.uk/guidance/corporation-tax-calculating-and-claiming-a-loss
Overview of Corporation Tax trading losses
If your company or organisation is liable for Corporation Tax and makes a loss from trading, the sale or disposal of a capital asset, or on property income, then you may be able to claim relief from Corporation Tax.
You get tax relief by offsetting the loss against your other gains or profits of your business in the same accounting period. You can also choose to carry the loss back. If you do not, it will be forward carried to another accounting period.
The trading profit or loss for Corporation Tax purposes is worked out by making the usual tax adjustments to the figure of profit or loss shown in your company or organisation’s financial accounts.
If you make a trading loss and it cannot be used in the same year, you may be able to choose to carry it back to earlier accounting periods, or it will be carried forward to be set off against the profit for future periods.
In order to calculate a trading loss you should:-
- include any capital allowances (these increase the loss)
- include any balancing charges (these reduce the loss)
- not include any losses or gains that might be made on the sale or disposal of assets
- include certain annuities and charitable donations (known as trade charges)
How to claim a Trading Loss
A claim for trading losses forms part of your Company Tax Return.
If your claim covers the company’s latest accounting period, then enter “0” in box 155 on form CT600 and put the full amount of the loss in box 780.
You should also enter the whole loss, or as much of the loss as you can claim, in box 275 against your total profits.
Groups and Trading Losses
If your company or organisation has a qualifying group relationship with another company, then you can choose to offset certain losses, including trading losses, against profits of other members of the group, instead of carrying it forwards or back.
Carrying a Trading Loss Forward
Trading losses that you have not used in any other way can be offset against profits in future accounting periods, so long as the trade continues.
Trading losses are carried forward and set against profits of the same trade of the next accounting period for losses made in accounting periods ending before 1st April 2017.
You do not have to make any claim for this to happen as it is done automatically if you fill in your Company Tax Return.
For accounting periods from 1st April 2017, the way trading losses are set off will depend on when they arise.
Corporation Tax trading losses that arise up to 31st March 2017
These losses are carried forward and set against profits of the same trade of the next accounting period. A claim is not needed and the set off is done automatically.
If you do not want the losses set off, you can make a claim for these to be carried forward and set against trading profits of the following period instead.
The claims must be made within 2 years of the end of the accounting period for which no relief is to be given. The claim should normally be made by amending your tax return.
Losses that arise from 1st April 2017
These losses are carried forward. In most cases they can be set against total profits of the company, or in certain circumstances, against total profits of a group company.
You need to make a claim for the relief within 2 years of the end of the accounting period in which the losses are to be set off. The claim should normally be made by amending your tax return.
Accounting periods that begin before and end after 1st April 2017
The profits and losses of the periods are apportioned.
Profits and losses arising:-
- before 31 March 2017 are treated as arising in a separate accounting period ending on that date
- from 1 April 2017 are treated as arising in a separate accounting period beginning on that date
Carrying back corporation tax trading losses
Instead of carrying a loss forward, you can claim for the loss to be offset against profits for the earlier 12 month period (not accounting period).
You can only do this if your company or organisation was carrying on the same trade at some point in the accounting period or periods that fall in the earlier 12 month period.
For example, if your company or organisation has a loss of £8,000 in the accounting period 1st January 2016 to 31st December 2016 and profits of £20,000 in the earlier 12 months, you can carry back the £8,000 loss to be set off against the profits for the previous accounting year, this will reduce them from £20,000 to £12,000.
If an accounting period straddles that 12 month period, the profit for that period is apportioned and the loss can only be offset against that portion of the profit that falls within the 12 month period.
For example, your company or organisation has a loss of £8,000 in the accounting period 1st January 2016 to 31st December 2016 and it’s recently changed its accounting date, so that the accounting periods and profits of the earlier periods were:
- £2,000 for 1st July 2015 to 31st December 2015
- £10,000 for 1st July 2014 to 31st July 2015
You can carry back £2,000 of the loss to cover the whole of the profit in the period ended 31st December 2015.
The balance of the loss of £6,000 cannot be entirely carried back as only 6 months of the profits of £10,000 fall into the earlier 12 months of the loss making period.
Only a loss of £5,000 (6/12 x £10,000) can be used, and the balance of £1,000 is available to be carried forward to the year ended 31st December 2017.
How to claim for corporation tax trading losses to be carried back
You can make a claim to carry back a trading loss when you submit your Company Tax Return for the period when you made the loss.
You can make your claim in your return or in an amendment to the return, as long as you are within the time limit to amend it. The claim can also be made in a letter.
If you are making a claim in your return that reduces your Corporation Tax liability for an earlier period, you must make sure you have put an “X” in the appropriate box on the CT600 form.
A claim should be made within 2 years of the end of the accounting period when you made the loss. Your claim should include:
- the name of your company or organisation
- period when the loss is made
- the amount of the loss
- how the loss is to be used
If you are offsetting a loss against an accounting period where you have already paid the tax due, HMRC will send you a repayment, unless you owe any Corporation Tax, when it will be deducted from the payment first.
If you require further information on corporation tax trading losses, please contact Stallion Accountancy Services.