How to work out and claim relief from Corporation Tax trading losses?

Company losses are often considered one of the complex areas of tax to deal with, and it is all due to the involvement of details on how you can utilise the losses.

The losses can be generally offset against your total profits - gains or business profits and can get tax relief in the same accounting period. If you don’t want to carry forward the losses to another accounting period, you can carry them back to an earlier year.

The article examines how trading losses can be relieved by a company.

• Trading losses
• Carrying forward a trading loss
• Carrying back a trading loss
• Claiming trading loss to be carried back, or amend a claim

Trading losses

The trading profits or losses can be calculated for corporation tax purposes by way of making tax adjustments to the profit or loss figure displayed in financial accounts of your company. Before adjusting any trading profit/loss, you must consider –

1. Capital allowances (which increases the loss)
2. Balancing charges (which reduces the loss)
3. While calculating your trading losses, do not include any losses or gains arising from disposal or sale of assets.
4. Certain annuities and charitable donations, also known as trading charges.

Suppose you make a trading loss but can’t use it in the same year; then you can elect to carry back the loss to earlier accounting periods or carry forward it to the future periods to be set off against the profits.

The trading losses incurred by a company can be relieved in the following 3 ways:

1. total profits of the same accounting period then;
2. total profits of the previous 12 months;
3. carried forward against future profits

Also See: Tips to reduce Corporation Tax

Carrying forward a trading loss

Certain trading losses that the company cannot use can be carried forward and offset against profits in future accounting periods.

Relief for losses for accounting periods after 1 April 2017

Certain restrictions depend on when the losses were incurred. There are broadly two restrictions which apply to carry forward trading losses –

1. Before 1 April 2017

   : The losses incurred before 1 April 2017 can only be offset against future trade profits. Further, the amount that can be relieved is restricted to the allowance amount up to £5 million, plus 50% of remaining trading profits after the allowance deduction.

2. After 1 April 2017

   : The losses incurred after 1 April 2017 can be offset against future total profits. The overall amount that can be offset is restricted to allowance amount up to £5 million plus 50% of remaining total profits after the allowance deduction.

Total profits mean income and gains before deducting qualifying charitable donations.

Carrying back a trading loss

The losses can also be carried back and relieved against profits for the earlier 12 months period (not accounting period), and it is termed as “Carrying a trading loss back”. Instead of carrying the trading loss forward, you can claim it for an earlier 12-month period. It can only be possible if your company/organisation was engaged in the same trade at some point of time in the accounting period or periods that fall under the earlier 12 months. A carry back claim can only be made after a current year claim.

For example – Suppose your company/organisation suffered a loss of £8,000 in the accounting period 1 January 2018 to 31 December 2019. The companymade a profit of £20,000 in the previous 12 months. You can elect to carry back the loss of £8,000 and offset it against the total profits for the earlier accounting period, which could result in a reduction of profits from £20,000 to £12,000 and generate a repayment of CT paid for the earlier accounting period.

If an accounting period straddles the period of 12 months, the profit is apportioned for that particular period, and losses can only be offset against the profit portion that falls under the period of 12 months.

Claiming trading loss to be carried back, or amend a claim

If you want to elect for a trading loss to be carried back, you can do so at the time of submission of the company tax return for the period when you suffered a loss. You can make a claim in the following ways -

1. By mentioning in your current Company Tax return
2. By amending your company tax return for the earlier year. Make sure this is completed without crossing the amendment time limit.
3. By letter to HMRC

If you have made a loss make sure that you make your claim within 2 years of the end of the accounting period. It must include the following –

1. Name of your Company
2. Period of loss
3. Loss amount
4. How you will utilise the loss

If you don’t want to make a claim in your return and send it separately, send it to HMRC. You can even make an amendment in your claim in the same way as you amend your tax return. HMRC can carry out a compliance check on the claim you have made into your return or any further amendment, but if any such compliance check doesn’t occur, such loss amount will then be considered the final amount. You may also be asked by HMRC regarding the use of losses in a future return (for example – To know that whether you are still carrying the same trade or not).

In case you’re offsetting a loss against profits in an accounting period, where you’ve already made the payment for the due taxes, a repayment will be sent to you by HMRC unless you owe any corporation tax, which is to be deducted from the first payment.

Also See: Benefits of Early Tax Return Filing

If you require any further guidance and tips on working out and claiming relief from Corporate Tax trading losses (Carry forwarding of trading loss or Carrying a trading loss back), Contact DNS Accountants on 03330886686, or you can also e-mail us at enquiry@dnsaccountants.co.uk

About the author

Siddharth Agarwal
I am a Chartered Tax Advisor (OMB) and ACCA. I have 9+ years of experience in owner-managed business taxation issues, company reorganisations, property taxation, and succession planning. I also work with private clients on bespoke tax planning strategies for trusts, residence status, and non-residents. I aim to fulfil my professional duties towards my clients and keep them satisfied, my utmost priority. I believe in establishing and maintaining businesses and personal relationships as the key to mutual growth.