TXF6 UK
Syllabus E. Corporation Tax Liabilities E2. Taxable total profits

E2f. Total income relief for trading losses

Syllabus E2f)

Understand how trading losses can be claimed against income of the current or previous accounting periods
and
The use of such exemptions and reliefs is implicit within all of the above sections 1 to 5 of part E of the syllabus, concerning corporation tax.

How to get tax relief for trading losses?

If a trading loss is made, it can be deducted from a company's total income

For example in the tax year ending 31/03/2019, Cow plc. made a trading loss of (£100,000), it also had property income of £75,000 and chargeable gains of £35,000.

Cow plc can relieve the trading loss by deducting it from it's total income:

Property income £75,000
Chargeable gains £35,000
Total £110,000
Less:
Current year trading loss (£100,000)
Total profits £10,000 - this is the amount that corporation tax will be paid on. 

The carry back total income claim means that if a company makes a trading loss in a tax year, it can deduct the loss from the previous 12 month's total income.

For example in the tax year ending 31/03/2019, Cow plc. made a trading loss of (£100,000), it had no other income in that year.

Cow plc. had property income of £75,000 and chargeable gains of £35,000 in the tax year ending 31/03/2018.

Cow plc can relieve the trading loss by deducting it from it's total income in the tax year ended 31/03/2018.

Property income £75,000
Chargeable gains £35,000
Total income £110,000
Less:
Trading loss carried back (£100,000)
Total income £10,000 - this is the amount that corporation tax will be paid on.

  • Unlike for individuals, the current year total income claim must be made before the claim against total income for the previous 12 months.

    For example Milk plc. made a trading loss of (£100,000) in the tax year ending 31/03/2019.

    It also had property income of £25,000 in the tax year ending 31/03/2019.

    Milk plc. had total income of £200,000 in the tax year ended 31/03/2018.

    The trading loss of 31/03/2019 must first be deducted from total income of 31/03/2019, and can then be carried back to the total income of 31/03/2018.

    Current year relief:

    Property income £25,000
    Less
    Current year trading loss (£25,000)
    Total income £Nil - no corporation tax will be paid in the year ending 31/03/2019

    Carry back relief:

    Total income £200,000
    Less:
    Trading loss carried back (£75,000)
    Total income £125,000 - corporation tax will be paid on this amount in the tax year ended 31/03/2018.

    Note you must always use the trading loss in the current year before you carry it back.

  • The loss must be deducted in full when a claim is being made. 

    It cannot be deducted partially. 

    Therefore, qualifying charitable donations are deducted after the trading loss and may be wasted.

    For example Antler plc. made a trading loss of (£100,000) in the tax year ending 31/03/2019.

    It also had property income of £125,000 and made qualifying charitable donations of £35,000 in the year. 

    Year ending 31/03/2019:

    Property income £125,000
    Less:
    Trading loss (£100,000)
    Total income £25,000
    Less:
    Qualifying charitable donations (£25,000)
    Total income £Nil - no corporation tax will be paid.

    Note £10,000 (£35,000-£25,000) of the qualifying charitable donation was wasted because the claim for loss relief must be made in full.

  • There is another way to claim loss relief, this is the carry forward claim, explained in Topic:  Carry forward relief of trading losses 

    After the current year total income claim and carry back total income claim, if there is still a trading loss remaining - the carry forward claim is then used.

Illustration:

Pulkit Ltd. made the following income for the year ended 31/03/2019:
Trading income (£30,000)
Property income £20,000
Interest income £5,000
Qualifying charitable donations £5,000
Pulkit Ltd. made the following income for the year ended 31/03/2018:
Trading income £20,000
Property income £20,000
Interest income £5,000
Qualifying charitable donations £5,000

How can the trading loss of the year ended 31/03/2019 be relieved?

Solution:

The trading loss of 31/03/2019 can be relieved against:

  1. Current year total income

  2. Carry back 12 months of total income

  3. Total profits of future years

Here we will illustrate only the current year total income claim and the carry back claim against total income for 12 months.

Trading loss of (£30,000) incurred in the year ended 31/03/2019 will be relieved against the total income generated in 31/03/2019.

In the year ended 31/03/2019
Trading income Nil
Property income £20,000
Interest income £5,000
Trading income total income claim (£25,000)

The qualifying charitable donations for the year ended 31/03/2019 have been wasted.

In the year ended 31/03/2018: 
The carry back total income claim for 12 months:
Trading income £40,000
Property income £20,000
Interest income £5,000
Trading loss relief carry back claim (£5,000)
Qualifying charitable donations (£5,000)
Taxable total profits £55,000

Notice here that the qualifying charitable donation has not been wasted, as there was enough income remaining for it to be deducted.

Loss memo:
Trading loss of 31/03/2019 (£30,000)
Current year total income claim £25,000
Carry back total income claim £5,000
Loss to be carried forward Nil 

Terminal loss relief

If a trading loss occurs in the final 12 months of trading, then this trading loss can be carried back for 36 months against the total income of the company., on a LIFO (last in first out) basis. 

Once again, the loss cannot be restricted to save qualifying charitable donations. 

For example Creamy plc. made a trading loss of (£100,000) in its final year of trading. 

It had the following total income:

Year ended 31/03/2019 - £40,000
Year ended 31/03/2018 - £20,000
Year ended 31/03/2017 - £55,000

The trading loss of (£100,000) will first be relieved against the total income of 31/03/2019:

Total income £40,000
Less:
Terminal loss relief (£40,000)
Total income £Nil - whatever corporation tax has been paid will be repaid to the company by HMRC

Then, 

The trading loss of (£60,000) (£100,000-£40,000)will second be relieved against the total income of 31/03/2018:

Total income £20,000
Less:
Terminal loss relief (£20,000)
Total income £Nil - whatever corporation tax has been paid, part of it will be repaid to the company by HMRC

Then,

The trading loss of (£40,000) (£100,000-£40,000-£20,000)will second be relieved against the total income of 31/03/2017:

Total income £55,000
Less:
Terminal loss relief (£40,000)
Total income £15,000- whatever corporation tax has been paid will be repaid to the company by HMRC

Note for the years in which tax has already been paid, this will result in a repayment of tax.