ACCA TX ^UK Syllabus E. Corporation Tax Liabilities - Carry forward relief of trading losses - Notes ^{9 / 14}

You can deduct a trading loss from Future Total Income

This rule came into force for losses from 1 April 2017. 

In your exam you will not be tested on losses that arose before 1 April 2017.

You have to start claiming it within 2 years
Claims for carried forward loss relief must be made within 2 years of the end of the accounting period in which the loss is relieved. 

BUT once you start claiming it, then Trading losses can be carried forward for any amount of time, until the full amount of the loss has been relieved.

• For example (Cow plc ) 
  In 2024 - a trading loss of (£30,000)
  In 2025 - a trading profit of £50,000 and investment income of £20,000.

  Calculate Total taxable profits:

  Trading profit £50,000
  Investment income £20,000
  Total Income £70,000
  Less:
  Trading loss carried forward (£30,000)

  Total taxable profit £40,000 - this is the amount that will be taxed, after the carried forward loss has been deducted.

REMEMBER:

Unlike the current year and carry back loss relief, under carry forward loss relief a company can choose the amount of trading loss to use in order to save its charitable donations.

• For example (Cow plc.) 
  In 2024 - a trading loss of (£30,000)
  In 2025 - a trading profit of £50,000

  In 2025 - Cow plc also made a qualifying charitable donation of £35,000.

• Calculation of Total taxable profits:
  Trading profit £50,000
  Less:
  Trading loss carried forward (£15,000) (restricted to save charitable donation)

  Trading profit £35,000 
  Less:
  Qualifying charitable donation (£35,000)

  Total taxable profit £Nil - no trading profit will be taxed in the tax year ending 31/03/2025.

• The remaining trading loss of £15,000 (£30,000-£15,000) will be carried forward to future years.

  Trading losses can be carried forward for any amount of time, until the full amount of the loss has been relieved.

Illustration:

How can the trading loss of the year ended 31/03/2024 be relieved against future Total Income?

Solution:

Trading loss of (£50,000) incurred in the year ended 31/03/2024 will be relieved against the total Income generated in 31/03/2025.

But only £40,000 of the loss needs to be used, the remaining £5,000 of total profits is covered by qualifying charitable donations.

The remaining £10,000 of the loss will be carried forward to offset against future total profits.

Loss memo:

Note

An alternative would be to use the loss in the current year and offset £25,000 against other income.

The downside of this is that £5,000 of donations would be wasted.

Restrictions on carried forward loss relief

Companies are entitled to a deductions allowance of £5M for a 12 month period for brought forward trading and capital losses. 
Companies can choose how the allowance will be allocated between the brought forward trading and capital losses.

The maximum relief for the carried forward trading loss will be the amount of deduction allowance available plus 50% of the company’s profits after deduction of current period loss reliefs (including group reliefs) and the deductions allowance.

For example, if total income was £12,000,000 and brought forward trading losses were £15,000,000 - the allowable deduction would be:

Total income    £12,000,000

B/f loss (allowable deduction)  (£5,000,000)

Total income     £7,000,000

Additional deduction   (£7,000,000 * 50% = £3,500,000)

Taxable total profit   £3,500,000

Notice here that the entire deductions allowance was given to the carried forward trading loss, so none will be available for the carried forward capital loss.

The maximum relief for carried forward capital losses will be the amount of deduction allowance available plus 50% of the excess of capital gains above this amount.

Companies in a group will only be entitled to one £5m deduction allowance, it can be allocated to any company/companies in the group.

You only need to have awareness of this restriction for the ATX-UK paper. NOT TX