Your loss, not mine!
Your loss, not mine!
A Guide to: Corporate Loss Relief
Corporation Tax is charged at a flat rate of 19% on a company’s total taxable profits
The rules were significantly relaxed from 1 April 2017 and the use of losses is now much more flexible
The major change is in the use of carried forward losses, which can be set against the total profit of the company and can also be surrendered to other companies in the group
What you need to know…
Corporation Tax is currently charged at a flat rate of 19% on a company’s total taxable profits, but the legislation requires the nature of those profits to be determined and disclosed on the corporate tax return. This may seem like an unnecessary complication but the main reason for the categorisation of profits is determining the relief available should the company make a loss rather than a profit.
Before April 2017 the corporate loss rules were fairly rigid and generally restricted losses such that they could only be used against profits of a similar nature. The rules were significantly relaxed from 1 April 2017 and the use of losses is now much more flexible. However, there are still restrictions so it is important to understand the rules to protect against unexpected tax liabilities when losses cannot be utilised. Additionally, the increased flexibility came with a new restriction on the total amount of losses can be offset in a year but there is a de minimis of £5milllion so this restriction should only impact the largest businesses.
It should be noted that whilst the rules changed in April 2017 they do not change the way in which losses arising before that date can be utilised – it is therefore now vital to understand whether losses arose before or after 1 April 2017. Losses arising in an accounting period which covered this date are apportioned based on the number of days in the period that fell before/after the date.
The government announced in the 2021 budget that the corporation tax rate would be increasing to 25% from 1 April 2023, however companies with taxable profits of less than £50,00 would continue to pay tax at 19%. This adds additional complexity to the decision on how to best use losses, as losses carried forward and used after 1 April 2023 will obtain relief at a potentially higher rate than losses carried back.
Types of profit or loss
- Trading – this is the results of the trading activity of the company, for example the sale of goods or services
- Rental – income arising from the letting of property generally must be treated as rental income. There is an exception for subletting of premises that are temporarily surplus to the company’s requirements which can be included the trading profit.
- Non-trading loan relationships (NTLR) – this is the official name for interest. Where a company pays or receives interest in the course of their trading activities it can be included in the trading profits, in any other case it must be separated out. Therefore, mortgage interest on a buy to let property is not included in the rental profits calculation, instead it is shown separately as a NTLR debit.
- Management expenses – some companies do not have a trade or a rental business against which to set their expenses, an example would be the holding company of a group. Where these companies have an investment business they can claim their costs as management expenses.
- Capital disposals – the rules for calculating capital gains and losses on the disposal of chargeable assets are broadly similar to those for individuals, with the exception that companies receive some relief for the impact of inflation in the form of indexation relief.
Any losses arising in the accounting period could be set against the company’s total profits for that period – the only exception was capital losses which could only be set against capital gains.
The non-capital losses could also be surrendered to other companies in the corporate loss group to be set against their total profits for the period. There is a similar rule which allows groups of companies to offset capital gains and losses amongst themselves, other the mechanics are slightly different.
If the company had made profits in the previous year any trading losses could be carried back and set against the total profits, and any NTLR losses could be carried back and set against the non-trading profits. This would trigger a refund of the relevant amount of corporation tax that had been paid in respect of the previous year profits.
If losses can’t be used in the period they will automatically be carried forward to the next period and we then have to consider if they can be utilised in that period. This exercise is still relevant as your company may have losses which arose before 1 April 2017 which have not yet been fully utilised.
Once carried forward trading losses can only be set against profits of the same trade, property losses can be set against total profits, NTLR losses can only be set against non-trade profits, management expenses can be set against total profits and capital losses can only be set against future capital gains.
There is no significant change to the use of losses in the current year or in the previous year – the only difference is that NTLR losses can now be set against total profits in the previous year rather than just non-trade profits.
The major change is in the use of carried forward losses, which can now be set against the total profit of the company and can also be surrendered to other companies in the group.
There group relief is generally restricted to companies which were part of the loss group at the point the losses arose.
There is no change to capital losses and how they can be utilised.
Temporary extension for losses arising from Covid pandemic
In order to allow companies to obtain more immediate relief for losses suffered during the pandemic the government announced a temporary extension to the loss carry back rules in the 2021 budget. Broadly, losses arising in accounting periods ending between 1 April 2020 and 31 March 2022 can be carried back and set against profits of the last 3 years instead of just the prior year. This is subject to a cap of £2m per year but could prove to be a lifeline to companies struggling with cash flow as they recover from the impact of the pandemic.