Corporation tax losses 2018

You’ve been trading happily for a few years, making a decent profit and life seems good. Then you lose your best customer, or a competitor enters the market with a cheaper product and, horror of horrors, you find that you’ve made a loss for the year.

Hopefully this will be only a temporary set-back and you’ll soon be back on track and making a profit.

In the meantime, help is available in the form of corporation tax “loss relief”.

 

Corporation tax loss relief

 

It has always been possible to relieve a loss against either a profit made from the same trade in the previous 12 month accounting period, or to carry forward the loss and relieve it against future profits from the same trade.

In all cases, it’s the “adjusted loss” as calculated for corporation tax purposes that’s being relieved. So it’s the usual disallowing of entertainment expenses, depreciation and profits/losses on sale of assets etc, but including capital allowances and balancing charges.

Let’s look at a couple of examples to see how the loss relief works.

 

 

When your accountant submits your corporation tax return for the year ended 31 March 2018, they will record that the loss is being carried back. They can also submit an amended corporation tax return for the year ended 31 March 2017 showing the loss made in the year ended 31 March 2018 being brought back.

Alternatively, your accountant can send a letter to HMRC claiming the loss. The claim will need to include the following information:

• The name of your company
• The period when the loss is made
• The amount of the loss
• How the loss is to be used

The time limit for making the claim is 2 years after the end of the accounting period in which you made the loss.

Your account with HMRC will be in credit and you will be sent a repayment of the overpaid corporation tax (if you haven’t paid in full the tax for the prior year, HMRC will deduct the amount you owe before making the repayment).

corporation tax trading loss

 

Carry back of all or part of the loss is optional – you can choose to leave the prior period alone and carry forward the whole loss for offset against future profits.

The procedure for carrying back the loss is the same as in example 1. You don’t need to make a claim for the loss that you carry forward. HMRC’s system automatically carries it forward for you.

 

Changes since 1 April 2017

Before 1 April 2017, losses could only be relieved against profits of the same trade. Losses made from 1 April 2017 onwards can be set against other profits of your business in the same accounting period.

Trading losses can also be carried back (but not prior to 1 April 2017) or carried forward and also relieved against other gains and profits of your business.

In many cases, this won’t be relevant, as you’ll only be carrying on one trade.

However, perhaps you’re an IT contractor but have a spouse or partner who sets up a domestic cleaning business and you decide to cut down on admin costs by running both businesses through the same company.

Should you happen to make a loss one year on one of the businesses, you will at least be able to reduce the corporation tax bill for the other business if it makes a profit.

Similarly, if you sublet office space, you will be able to offset gains and losses between your trading income and your rental income. In this case, though, losses on the rental side cannot be carried back. They can only be relieved against other profits of the same accounting period or be carried forward.

If you’re carrying forward a loss from one trade for relief against profits of another trade, you need to make a claim for the relief within 2 years of the end of the accounting period in which the losses are to be set off. You must still be carrying on the trade for which losses are being claimed.

 

Terminal loss relief

Sadly, there are times when you just have to recognise that your business will not be able to recover from a set-back, and you decide to stop trading rather than racking up further losses. The taxman is not totally heartless and, in these circumstances, extends the period you can carry back the loss from 12 months to 3 years. This is called “Terminal loss relief”.

The rule is that any loss you make in the final 12 months of trading can be carried back against profits made in the previous 12 months. If not fully relieved, profits made in the 12 months prior to that can then be used and, if necessary, the profits made in the 12 months prior to that as well.

So, say you made a loss in the 12 months ending 31st May 2018 (at which point you ceased trading), you could set this loss against profits made in the period 1st June 2014 to 31st May 2017.

The only restriction is that you must have been carrying on the same trade at some point in each accounting period.

 

This article is intended only as a brief summary of how corporation tax losses work but there are many details we have not covered – we recommend that you always discuss your own specific circumstances with an accountant.