You have ceased trading after being severely affected by the pandemic. How can you take advantage of changes made in 2017 to the rules for company losses?
Losses – generally
When a company makes a loss, you can claim corporation tax (CT) relief. There are particular rules you need to be aware of that concern the treatment of losses in the final years of the company trading. Sadly, with many companies closing down following the pandemic, you will probably be referencing these rules more often.
Sideways relief
Losses of one trade can generally be used to reduce the company’s CT bill on its other income. For example, a company made a loss in its manufacturing trade but profits from an asset rental business. It can claim sideways loss relief to reduce the CT payable on the profits of the other trade. It can choose to use the relief for the same year as the loss occurred, the previous one or, since 1 April 2017, a future one. This relief is of course of no use for companies which have only one business and only one income stream on which it pays CT.
Terminal losses
In your case, scope to carry the loss forward, and there is no other income to utilise sideways relief. You must therefore turn to the rules for terminal loss relief. Losses made in the final twelve months of trading, i.e. terminal losses, can be offset against profits of the previous three years.
Pro advice. If the previous accounting period was also loss making, you would need to time-apportion that loss to ensure you only include the portion of the loss arising in the last twelve months. This would be 4/12ths, because the final period was eight months long. However, if there is a profit it is excluded from the terminal loss calculation.
Example. Your loss for the eight months to 31 August 2020 was £30,000. In the year ended 31 December 2019, there was a profit of £50,000. The terminal loss is therefore £30,000, i.e. you do not add 4/12 x £50,000 to reduce the loss.
Enhancement
In April 2017 rule changes came into force. The focus was on expanding how sideways loss relief could be used. However, there was also an enhancement for terminal loss relief.
Pro advice. Relief can now be claimed for losses incurred in a period prior to the final twelve months of a business, for which sideways relief hasn’t been claimed, i.e. unused losses that have been brought forward.
Relief is allowed against profits of the terminal and previous accounting periods which fall within the three years leading up to the date on which the trade ceased, as set out in HMRC’s CTM04130 (see Follow up ). This three-year period is different from that for the normal terminal loss relief. This new relief won’t be applicable if the company has no unused losses, but you should always review the situation, as additional relief might be available.
You should be able to use terminal loss relief to utilise losses arising in the final twelve months of the trade. However, from April 2017 terminal loss relief was extended to include any unused carried forward losses. Check whether you have any such losses, or they may miss out on relief.
The next step
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.