Loss Relief for Companies
Companies are typically established with the goal of making a profit. However sometimes they may incur losses. When a company makes a loss it can utilise them depending on the type of loss. In this article we explore the different types of losses for companies and the available options for utilising those losses.
Trading Losses
When a company incurs a trading loss, it has several options for utilising them:
A company can offset the loss against total profits of the same accounting period, then carry it back against total profits for the previous 12 months; any unrelieved losses can then be carried forward against future profits.
A company can offset them against the total profits of the same accounting period; any unrelieved losses can then be carried forward against future profits.
The losses can be carried forward and set against future profits without being offset against total profits in the same accounting period.
In this context "total profits" refers to income and gains before deducting qualifying charitable donations.
Current Year and Carry Back Claims
A carry back claim can only be made after a claim for the current year loss has been submitted. Additionally, both current year and carry back claims are "all or nothing" — partial claims are not permitted.
The time limit for both current year and carry back claims is two years from the end of the loss-making accounting period. This is also the same time limit for amending the tax return for that accounting period.
Carry Forward Claims
Trading losses can be carried forward and set against future total profits subject to certain restrictions. The maximum amount of carried-forward losses that can be relieved in any future accounting period is the lower of:
The carried-forward unrelieved losses, and
The deduction allowance plus 50% of unrelieved profits - deduction allowance.
In this context, the deduction allowance is £5 million for a single company for a 12-month accounting period, and unrelieved profits are the total profits after current year loss relief.
The relief is not automatic, and the company must submit a claim within two years of the end of the accounting period in which the relief is to be claimed, specifying the amount to be offset.
Non-Trading Loan Relationship Deficits
Non-trading income and expenses are pooled together, and if the non-trading expenses exceed the income, the results in a deficit. This deficit can be:
Set against total profits in the loss-making accounting period, or
Carried back 12 months and set against non-trading profits.
Unused non-trading deficits can be carried forward and set against future total profits.
Intangible Fixed Asset (IFA) Losses
Expenses and income related to non-trading IFAs are also pooled. If the non-trading expenses exceed non-trading income this results in a non-trading loss on IFAs.
A company can claim to set the non-trading loss on IFAs against total profits for the loss-making accounting period.
Any unrelieved IFA losses are carried forward and set against future total profits. Carry back claims are not possible.
Capital Losses
Capital losses can be set against capital gains made in the same accounting period.
Unrelieved capital losses can only be carried forward against chargeable gains in future periods; carry back claims are not allowed.
Management Expenses
Management expenses are automatically set against total profits of the current accounting period.
If the management expenses exceed total profits, the company has excess management expenses. These can be carried forward and set against future total profits; again carry back claims are not possible.
Terminal Loss Relief
When a company ceases to trade, the trading loss incurred in the final 12 months of trading can be carried back against total profits from the previous 36 months, instead of the usual 12 months.
Speak to an Expert
In this article, we’ve provided an overview of the basic mechanisms relating to company losses. However, these rules are complex and come with various conditions, restrictions, and different claim deadlines. If you need assistance with maximising loss relief, please contact our tax team. We will be happy to help.
Authored by: London Team
