Best use of Corporation Tax losses
Significant changes to the relief of Corporation Tax losses were introduced in 2017. The following is a summary of where we are now:
Losses incurred pre 1.4.2017
A loss on one company activity (eg, a trading loss) could only be used against:
a) a profit arising from other activities in the same year (eg, against a rental income profit) ,
b) be carried forward to use in future years, but only for offset against taxable profits from the same activity. For example, a trading loss made by an electrical contractors business could only be off set against future profits from the same electrical contractors business
In addition, losses could only be group relieved (ie, used by a different company in the same group) in the year the losses were created. It wasn’t possible to claim group relief on the loss in a future year.
These rules effectively meant that many companies received restricted or even zero tax relief on losses, so, arguably, the policy discouraged business diversification .
Losses arising post 1.4.2017
Post 1 April 2017 losses which are carried forward can now be relieved against:
a) the total taxable profits of the company in future years – for example losses from one trade can now be offset against the profit of another trade, or from rental profits etc., etc
b) the total taxable profits of other companies in a group, provided the company receiving the loss has first used its own carried forward losses.
In addition, a trading loss can be carried back to earlier periods and relieved against total profits (subject to certain conditions being met).
Whilst post 2017 losses are therefore much easier to utilise, you should note the following important restrictions:
1) Losses created before 1 April 2017 will continue to be subject to the old rules (so losses should be pooled separately and you should use up pre 2017 losses first).
2) Larger business with profits in excess of £5 million will only be able to use losses against 50% of their profits above the £5 million limit.
3) The post 2017 rules do not affect the treatment of capital losses carried forward in a company. Any capital losses can still only be offset against capital gains in the same company and cannot be group relieved.
If you need advice on utilising Corporation Tax losses please call David Sutton on 015394 32540 or email firstname.lastname@example.org