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How to Carry Back or Forward Losses for Corporation Tax!

Updated: Apr 15


In the ever-changing landscape of taxation, understanding how to carry back losses for corporation tax is vital for businesses. The year 2024 brings specific considerations and rules that companies must be aware of to make the most of their trading losses. This article explores the details of carrying back losses for corporation tax in 2024.


How to Carry Back or Forward Losses for Corporation Tax


Understanding Trading Losses

Trading losses occur when a company's income is less than its allowable expenses within an accounting period. These losses can be offset against profits, reducing corporation or income tax. The carry-back period, which was temporarily extended to three years due to the COVID-19 pandemic, allows businesses to claim tax relief on their trading losses.


Thus the trading profit or loss for Corporation Tax purposes is determined by making standard tax adjustments to the profit or loss figure shown in your company or organisation’s financial accounts.


Calculating a Trading Loss

To compute a trading loss, you should:

  • Include any capital allowances (which increase the loss).

  • Include any balancing charges (which decrease the loss).

  • Exclude any losses or gains made on the sale or disposal of assets.

  • Include specific annuities and charitable donations (referred to as ‘trade charges’).

If a trading loss is made and cannot be used in the same year, it may be carried back to earlier accounting periods or carried forward to offset future profits.


How to Compute Trading Losses?

The computation of trading losses involves offsetting allowable business expenses against trading profit. Losses incurred between 1 April 2020 and 31 March 2022 can be carried back for three years. However, starting from the tax year 2022/23, the original one-year carry-back rule will return.


Claiming Trading Losses in 2024

With the corporation tax set to increase to 25% from 19% in April 2023, businesses may want to claim their relief or deduction allowance now or carry their loss forward to gain a 25% relief. Here are the options:


Current Year Relief: Offset the loss against the total profits of the current year.

Carry-Back Relief: Carry the loss back to offset against profits from the previous 12-month period.


Carry-Forward Relief: Carry the loss forward to future periods.

Group Relief: Offset trading losses against another group member’s profits.

Terminal Loss: Claim relief for losses incurred in the last 12 months of trading.


Eligibility Criteria

All businesses, regardless of size and location, can claim relief against their total profits of the same accounting period or the previous 12 months. Even companies that have ceased operations can claim trading loss reliefs through terminal loss relief.


2024

The primary focus on 2024 here is on the ongoing application of rules introduced in previous years, rather than new updates specifically commencing in 2024. The tax landscape can often involve long-term adjustments and phased implementations, so it's important to track when each rule was or will be applicable.


How to Claim Loss Relief on a CT600?

Claiming loss relief on a CT600 form involves specific instructions provided by HMRC. Claims below £200,000 may be made outside a return, allowing companies to claim without waiting to submit their company tax return.


A trading loss claim is part of your Company Tax Return. If the claim pertains to the latest accounting period, enter ‘0’ in box 155 on form CT600 and place the full loss amount in box 780. The entire loss, or the claimable portion, should also be entered in box 275 against total profits.


For claims including losses from a later accounting period, you must:

  • Enter ‘0’ in box 155 on form CT600.

  • Enter the full amount of trading losses arising in this or later accounting periods that can be claimed against total profits in box 275.

  • Place the loss amount arising in this accounting period only in box 780.


Carrying Forward a Trading Loss

Unused losses can be offset against future profits. Restrictions apply to carried forward losses from 1 April 2017, including allowances and limitations on the total amount that can be relieved.


Carrying a Trading Loss Back

Losses can be offset against profits for the earlier 12-month period. This is only possible if the same trade was carried on at some point in the accounting period(s) falling within the earlier 12 months.


Examples of Carrying Back Losses

  • If a loss of £8,000 occurs in the accounting period from 1 January 2016 to 31 December 2016, and profits of £20,000 were made in the earlier 12 months, the loss can be carried back, reducing profits to £12,000.

  • If an accounting period overlaps the 12-month period, profits are apportioned, and the loss can only be offset against the portion of profit within the 12-month period.


Temporary Extension to Carry Back Trade Losses

The Budget 2021 announced a temporary extension to the carry back of trading losses from one year to three years, for losses up to £2,000,000 for accounting periods ending between 1 April 2020 and 31 March 2022. Losses must be set against profits of the most recent years first.


The current one-year unlimited carry back of trade losses remains unchanged. For the extended relief, the amount of loss that can be carried back to the earlier two years is capped at £2,000,000 for each year.


Extended loss carry back claims must be made in a return. However, claims below £200,000 may be made outside a return, allowing companies with losses providing relief up to £200,000 to claim without waiting to submit their company tax return.


Groups and Trading Losses

If your company or organisation has a qualifying group relationship with another company, you can offset certain losses, including trading losses, against profits of other group


Anti-Avoidance Rules

Alongside the three-year loss carry-back extension, anti-avoidance rules were established to prevent group companies from claiming deduction allowance or relief with the purpose of disconnecting from a group. These rules continue to apply and must be considered by businesses in 2023.



How Do You Offset Losses Against Tax?

In the UK, businesses and self-employed individuals may face periods where they incur losses. These losses can be offset against other income or profits, providing a way to reduce tax liability. This process is governed by specific rules and regulations, and understanding how to apply them can be crucial for financial planning.


Types of Losses That Can Be Offset


1. Trading Losses

Trading losses occur when the expenses of a business exceed its income. These losses can be offset in various ways, depending on the circumstances.

2. Capital Losses

Capital losses arise from the disposal of capital assets at a loss. These can be offset against capital gains to reduce the Capital Gains Tax liability.


Methods of Offsetting Losses


1. Against Current Year's Profits

Losses can be set against the profits of the same trade in the current tax year. This can reduce the overall taxable income for the year.

2. Against Previous Year's Profits

If the losses exceed the current year's profits, they can be carried back and set against the profits of the previous tax year.

3. Sideways Loss Relief

This method allows the loss to be set against other income or capital gains. It's known as sideways loss relief and can be applied in specific situations.


Rules and Restrictions


1. Time Limits

There are time limits for claiming loss relief. Generally, the claim must be made within four years from the end of the tax year in which the loss occurred.

2. Restrictions on Capital Losses

Capital losses can only be offset against capital gains, not against other types of income.

3. Restrictions on Sideways Loss Relief

Sideways loss relief has specific restrictions, particularly for individuals who are not actively involved in the trade. The relief may be capped at £25,000 for those who spend less than 10 hours a week on the trade.


How to Claim Loss Relief?


1. Self-Assessment Tax Return

Losses can be claimed through the self-assessment tax return. The relevant sections must be completed, and the necessary calculations made.

2. Separate Claim

In some cases, a separate claim may be required. This can be done by writing to HM Revenue & Customs (HMRC) with the details of the claim.


Strategic Use of Loss Offset

Offsetting losses against tax in the UK is a complex area that requires careful consideration and understanding of the rules. By effectively utilizing the available options, businesses and individuals can optimize their tax position and potentially save significant amounts. Professional advice from a tax specialist or accountant may be beneficial to ensure compliance with the regulations and maximize the benefits of loss offset.


Carrying back losses for corporation tax remains a valuable tool for businesses in 2023. While the temporary three-year extension has ended, the original one-year carry-back rule is reinstated. Understanding the rules, eligibility criteria, and the process of claiming this relief is essential for businesses to maximise their trading losses and reduce their tax liability.


A Hypothetical Case Study of Carrying Back Losses for Corporation Tax


Company Overview:

XYZ Manufacturing Ltd., a UK-based company that specializes in automotive parts, experienced significant financial challenges due to a downturn in the automotive industry in 2022. The company reported a trading loss of £600,000 for the financial year ending December 31, 2022. In the previous three years, the company had profitable years as follows:


  • 2021: £300,000

  • 2020: £250,000

  • 2019: £200,000


Objective:

To optimize its tax position by utilizing the carry back losses provision under Corporation Tax rules in the UK.


Step-by-Step Calculation of Carry Back Losses:


Identifying Eligible Profits for Carry Back:

  • The company aims to carry back the £600,000 loss from 2022 to offset taxable profits in the previous three years, starting with the most recent profitable year.


Application of the Carry Back Losses:

  • 2021 Profits: £300,000

  • Carry back loss applied: £300,000

  • Remaining loss after 2021: £600,000 - £300,000 = £300,000

  • 2020 Profits: £250,000

  • Carry back loss applied: £250,000

  • Remaining loss after 2020: £300,000 - £250,000 = £50,000

  • 2019 Profits: £200,000

  • Carry back loss applied: £50,000 (maximum available loss)

  • Remaining loss: £50,000 - £50,000 = £0 (all losses utilized)


Tax Savings Calculation:

  • Assuming a Corporation Tax rate of 19% for all years:

  • Tax savings for 2021 = £300,000 × 19% = £57,000

  • Tax savings for 2020 = £250,000 × 19% = £47,500

  • Tax savings for 2019 = £50,000 × 19% = £9,500

  • Total tax savings = £57,000 + £47,500 + £9,500 = £114,000


Analysis of Financial Impact:


  • Cash Flow Improvement: The carry back of losses significantly improves the company's cash flow by generating tax refunds totaling £114,000. This immediate cash injection can be critical for sustaining operations, investing in strategic initiatives, or reducing debt.

  • Strategic Considerations: Carrying back losses not only provides a tax benefit but also helps in managing the company's tax rate fluctuations over years. It smooths out the impact of economic cycles on the company's financial statements, providing a more stable outlook for investors and stakeholders.

  • Compliance and Documentation: XYZ Manufacturing Ltd. must ensure proper documentation and compliance with HMRC guidelines. This includes detailed records of losses, the tax calculations for each year, and timely submission of claims. Failure to comply can result in disallowed claims or penalties.


In this hypothetical scenario, XYZ Manufacturing Ltd. effectively uses the carry back losses provision to mitigate the financial impact of a bad trading year by reclaiming a substantial amount of previously paid taxes. This strategic tax planning is essential for maximizing cash flow and maintaining financial stability during downturns.

This case study exemplifies how businesses can leverage tax laws to their advantage in times of financial distress. It’s crucial for businesses to stay informed about tax provisions that can affect their financial planning and seek professional advice to ensure compliance and optimal tax handling.


Case Study of Carrying Forward Losses for Corporation Tax


Company Overview:

GreenTech Innovations Ltd. is a UK-based startup focused on developing renewable energy solutions. Due to significant research and development costs, the company incurred a trading loss of £800,000 in the financial year ending December 31, 2024. As a new entrant in the market, the company did not have profits in prior years to carry back losses and thus is considering carrying forward these losses to future profitable years.


Objective:

To leverage the carry forward loss provision under Corporation Tax rules in the UK to minimize future tax liabilities.


Detailed Steps for Carrying Forward Losses:


Assessment of Available Losses:

  • The company has an available trading loss of £800,000 from the year 2024.

Future Profit Projections:

  • For this hypothetical scenario, let's assume GreenTech projects the following profits:

  • 2025: £200,000

  • 2026: £400,000

  • 2027: £500,000

Applying Carried Forward Losses Against Future Profits:

  • 2025:

  • Profit: £200,000

  • Loss to offset profit: £200,000 (all 2025 profit offset)

  • Remaining loss: £800,000 - £200,000 = £600,000

  • 2026:

  • Profit: £400,000

  • Loss to offset profit: £400,000 (all 2026 profit offset)

  • Remaining loss: £600,000 - £400,000 = £200,000

  • 2027:

  • Profit: £500,000

  • Loss to offset profit: £200,000 (only part of 2027 profit offset)

  • Remaining loss after 2027: £200,000 - £200,000 = £0

Tax Savings Calculation:

  • Assuming a Corporation Tax rate of 19% for all future years:

  • Tax savings for 2025 = £200,000 × 19% = £38,000

  • Tax savings for 2026 = £400,000 × 19% = £76,000

  • Tax savings for 2027 = £200,000 × 19% = £38,000

  • Total tax savings = £38,000 + £76,000 + £38,000 = £152,000


Financial Impact Analysis:


  • Improved Cash Flow: Carrying forward losses significantly enhances the company's cash flow management by reducing the future tax payments. This results in total tax savings of £152,000, which can be reinvested into the business to fuel growth and innovation.

  • Strategic Financial Planning: Utilizing the carry forward losses allows GreenTech Innovations Ltd. to manage its effective tax rate efficiently, making the company more attractive to investors due to its strategic financial planning.

  • Compliance and Documentation: The company must maintain rigorous documentation to support the losses carried forward, ensuring compliance with HMRC requirements. This includes detailed financial records, loss calculations, and justifications for projections used in future profitability.

  • Long-term Financial Strategy: This approach helps GreenTech in strategizing for long-term financial health, aligning tax planning with business development phases. It also provides a buffer against the variability in profitability, particularly important in industries like renewable energy where market adoption rates can be uncertain.


In this hypothetical scenario, GreenTech Innovations Ltd. effectively uses the provision of carrying forward losses to manage its financial landscape over multiple years, turning a challenging financial situation into a strategic advantage. This case study highlights the importance of proactive tax planning and the need for startups to integrate tax considerations into their broader financial strategy to optimize outcomes.


This example demonstrates the critical role of understanding and applying tax regulations to support business sustainability and growth. Businesses, especially startups, should consider consulting tax professionals to ensure compliance and optimal use of tax reliefs like carrying forward losses.


How Can a Tax Accountant Help You Manage the Trade Losses for Corporation Tax


How Can a Tax Accountant Help You Manage the Trade Losses for Corporation Tax?

Corporation Tax in the UK applies to company profits, but when a company incurs a loss, specific rules enable the losses to be carried forward or back against profits, thereby reducing the tax liability. This complex process requires a deep understanding of UK tax law, and that's where a tax accountant's expertise can be invaluable.


Assessing Trade Losses

Trade losses occur when a company's allowable trading expenses exceed its trading income. A tax accountant can:


  1. Identify and Analyse Losses: They evaluate the expenses and incomes, distinguishing between trade losses and other types of losses.

  2. Application of Reliefs: Help apply for reliefs like loss carry back or loss carry forward, depending on the situation and follow the prevailing laws.


Utilising Loss Carry Back

Loss carry back involves offsetting losses against profits from previous accounting periods. A tax accountant can:


  1. Determine Eligibility: Ensure the losses qualify for carry back by adhering to rules.

  2. Calculate the Correct Amount: Determine the correct amount of loss that can be carried back to avoid mistakes.

  3. Submit Necessary Documentation: Prepare and submit all necessary paperwork, such as amended Corporation Tax returns.


Exploiting Loss Carry Forward

If losses cannot be used in the current or previous periods, they can be carried forward. A tax accountant can:


  1. Understand the Limitations: Recognize when and how losses can be carried forward, including restrictions on usage.

  2. Maximize Utilisation: Strategically apply the losses against future profits to minimize future tax liabilities.


Group Relief for Losses

Companies within the same group can also surrender losses to one another. A tax accountant can:


  1. Identify Opportunities: Pinpoint scenarios where group relief may be beneficial.

  2. Ensure Compliance: Confirm that all conditions for group relief are met.

  3. Facilitate the Process: Handle the necessary paperwork and communicate with relevant parties.


Handling Terminal Loss Relief

Terminal loss relief allows businesses to carry back losses from the last 12 months of trading to the previous three years. A tax accountant can:


  1. Identify Terminal Losses: Recognise if losses qualify for terminal loss relief.

  2. Apply the Relief Effectively: Calculate and apply the relief to appropriate accounting periods.


Providing Expertise in Changing Regulations

Tax laws and regulations are subject to changes, and it's crucial to remain compliant. A tax accountant can:


  1. Stay Updated: Keep abreast of changes in tax legislation related to trade losses.

  2. Advise on Impact: Provide insights on how changes affect the business's specific situation.

  3. Implement Changes: Assist in implementing any necessary adjustments to ensure continued compliance.


An Essential Partner in Managing Trade Losses

Managing trade losses for Corporation Tax in the UK is an intricate process that involves multiple considerations, calculations, and compliances. A tax accountant's expertise can guide a business through these complexities, ensuring the most effective and lawful management of losses. By doing so, they help companies minimize their tax liabilities, remain compliant with tax laws, and align their strategies with their broader financial goals. Partnering with a tax accountant is not merely an option; it is a vital strategy for any UK-based corporation aiming to efficiently manage its trade losses.



FAQs


  1. What documentation is required to support a loss carry-back or carry-forward claim?

  • Companies need to provide financial statements, detailed accounts showing the loss, and any relevant tax computations to support their claims.

  1. How are losses from discontinued operations treated for corporation tax purposes?

  • Losses from discontinued operations can be set against profits from continuing operations or carried back against profits from the discontinued operation, subject to certain conditions.

  1. Can a company change its accounting period to maximize the benefit of loss relief?

  • Companies can change their accounting period, but they must comply with HMRC rules and may need to justify the change to avoid suspicion of tax avoidance.

  1. Are there specific rules for start-up companies regarding loss carry-back or carry-forward?

  • Start-up companies follow the same general rules for loss relief as established companies, but they may have limited profits against which to set losses in the early years.

  1. What impact do group structures have on the ability to carry back or forward losses?

  • Companies within a group can transfer losses to other group members using group relief, provided certain conditions are met.

  1. How does HMRC verify the accuracy of loss relief claims?

  • HMRC may request detailed documentation, conduct audits, or inquire into the accounts to verify the accuracy of loss relief claims.

  1. What are the consequences of incorrect loss relief claims?

  • Incorrect claims can result in penalties, additional tax charges, and interest on overdue tax.

  1. Can loss relief be denied by HMRC?

  • Yes, HMRC can deny loss relief if the claim does not meet legal requirements or if there is evidence of tax avoidance or non-compliance.

  1. Are there limitations on the amount of losses that can be carried forward?

  • Yes, there are limitations, especially for large companies, where losses carried forward can only offset up to 50% of profits in a given year.

  1. What happens to loss relief if a company is sold?

  • Loss relief may be restricted following a change in ownership, especially if there is a major change in the nature or conduct of the business.

  1. Can losses be carried back or forward indefinitely?

  • No, losses can usually only be carried back one year but can be carried forward indefinitely, subject to specific conditions and limitations.

  1. How are capital losses treated differently from trading losses?

  • Capital losses can only be set against capital gains, not against trading income, and have different rules for carry-back and carry-forward.

  1. What are the rules for setting losses against capital gains?

  • Trading losses cannot generally be set against capital gains, but capital losses can be carried forward indefinitely to offset future capital gains.

  1. Is it possible to claim loss relief for a loss made in a foreign branch?

  • Yes, losses in foreign branches can be claimed, provided they are included in the UK tax computations and not relieved in another jurisdiction.

  1. Are sole traders or partnerships eligible for similar loss reliefs as corporations?

  • Sole traders and partnerships can claim loss relief against other income or carry forward losses against future profits, but the rules differ from corporations.

  1. What specific conditions apply to terminal loss relief?

  • Terminal loss relief applies in the final year of trading and can be carried back against profits of the previous three years, subject to certain conditions.

  1. How do changes in tax legislation affect existing loss relief claims?

  • Changes in legislation can restrict or enhance loss relief claims, and transitional rules may apply to claims made under old legislation.

  1. Can a company still claim loss relief if it has started the liquidation process?

  • Yes, companies in liquidation can claim loss relief, including terminal loss relief, but must comply with specific rules regarding cessation of trade.

  1. What role do tax advisors play in managing corporation tax losses?

  • Tax advisors help ensure compliance, optimize the use of losses, and advise on the strategic use of loss reliefs to minimize tax liabilities.

  1. How are reimbursed losses treated for tax purposes?

  • If a loss has been compensated, for example through insurance, the amount reimbursed may reduce the allowable loss for tax purposes.



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