CAT / FIA FTX Syllabus E. Corporation Tax Liabilities - Total income relief for trading losses - Notes
Total income relief for trading losses
How to get tax relief for trading losses?
For example in the tax year ending 31/03/2024, 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 31/03/2024, 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 31/03/2023.
Cow plc can relieve the trading loss by deducting it from it's total income in the tax year ended 31/03/2023.
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 31/03/2024.
It also had property income of £25,000 in the tax year ending 31/03/2024.
Milk. plc had total income of £200,000 in the tax year ended 31/03/2024.
The trading loss of 31/03/2024 must first be deducted from total income of 31/03/2024, and can then be carried back to the total income of 31/03/2023.
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 31/03/2023Carry back relief:
Total income £200,000Less:
Trading loss carried back (£75,000)
Total income £125,000 - corporation tax will be paid on this amount in the tax year ended 31/03/2023.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 31/03/2024.
It also had property income of £125,000 and made qualifying charitable donations of £35,000 in the year.
Year ending 31/03/2024:
Property income £125,000Less:
Trading loss (£100,000)
Total income £25,000Less:
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 31/03/2024: | |
---|---|
Trading income | (£30,000) |
Property income | £20,000 |
Interest income | £5,000 |
Qualifying charitable donations | £5,000 |
Results for the year ended 31/03/2023 | |
---|---|
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 31/03/2024 be relieved?
Solution:
The trading loss of 31/03/2024 can be relieved against:
Current year total income
Carry back 12 months of total income
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 31/03/2024 will be relieved against the total income generated in 31/03/2024.
In the year ended 31/03/2024 | |
---|---|
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 31/03/2024 have been wasted.
In the year ended 31/03/2023: | |
---|---|
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 31/03/2024 | (£30,000) |
Current year total income claim | £25,000 |
Carry back total income claim | £5,000 |
Loss to be carried forward | Nil |