If your company or organisation is liable for Corporation Tax and makes a loss from trading, the sale or disposal of a capital asset, or on property income, then you may be able to claim relief from Corporation Tax.
You get tax relief by offsetting the loss against your other gains or profits of your business in the same accounting period. You can also choose to carry the loss back or it will be carried forward to another accounting period.
This guide explains how and when you can claim tax relief on a loss.
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The trading profit or loss for Corporation Tax purposes is worked out by making the usual tax adjustments to the figure of profit or loss shown in your company or organisation's financial accounts.
In particular, to calculate a trading loss you should:
If you make a trading loss and it can't be used in the same year, you may be able to choose to carry it back to earlier accounting periods, or it will be carried forward to be set off against the profit for future periods, as explained below.
A claim for trading losses forms part of your Company Tax Return. If your claim covers the company's latest accounting period, then enter '0' in Box 3 on form CT600 and put the full amount of the loss in Box 122. You should also put the whole loss, or as much of the loss as you can claim, in Box 30 against your total profits.
But, if the claim includes losses from a later accounting period, then you must do all of the following:
If your company or organisation has a qualifying group relationship with another company, then you can choose to offset certain losses, including trading losses, against profits of other members of the group, instead of carrying it forwards or back.
Trading losses that you've not used in any other way will be offset against profits from the same trade in future accounting periods. You don't have to make any claim for this to happen. It's done automatically if you fill in your Company Tax Return as described in the section in this guide on trading losses.
Instead of carrying a loss forward, you can claim for the loss to be offset against profits for the preceding 12-month period (not accounting period). But you can only do this if your company or organisation was carrying on the same trade at some point in the accounting period or periods that fall in the preceding 12-month period.
For example, if your company or organisation has a loss of £8,000 in the accounting period 1 January 2010 to 31 December 2010 and profits of £20,000 in the preceding 12 months, you can carry back the £8,000 loss to be set off against the profits for the previous accounting year, reducing them from £20,000 to £12,000.
But, if an accounting period straddles that 12-month period, the profit for that period is apportioned and the loss can only be offset against that portion of the profit falling within the 12-month period.
For example, if your company or organisation has a loss of £8,000 in the accounting period 1 January 2010 to 31 December 2010 and it has recently changed its accounting date, so that the accounting periods and profits of the preceding periods were 1 July 2009 to 31 December 2009 £2,000 and 1 July 2008 to 31 July 2009 £10,000, you can carry back £2,000 of the loss to cover the whole of the profit in the period ended 31 December 2009. The balance of the loss of £6,000 can't be entirely carried back as only six months of the profits of £10,000 fall into the preceding 12 months of the loss making period. Therefore only a loss of £5,000 (6/12 x £10,000) can be used and the balance of £1,000 is available to be carried forward to the year ended 31 December 2011.
HM Revenue & Customs (HMRC) has announced a temporary extension to the loss relief rules for trading losses.
For accounting periods ending between 24 November 2008 and 23 November 2010, you can carry back trading losses to the preceding three-year period (rather than 12 months). Any loss must be fully offset first against profits of most recent years before being carried back to earlier years.
There is no change to the current one year unlimited carry back of trade losses. But for the extended relief, the amount of loss that can be carried back to the earliest two years of the extended period is to be capped at £50,000.
This £50,000 limit applies separately to each 12-month period within the duration of the extension. This means a cap of £50,000 on losses incurred in accounting periods ending in the 12 months to 23 November 2009 and a separate £50,000 for losses arising in accounting periods ending in the 12 months to 23 November 2010.
A company has trading losses of £190,000 in the 12 month accounting period to 31 December 2008 and further trading losses of £100,000 in the next 12 month accounting period to 31 December 2009 .The company can offset this loss in this way:
|Accounting period||Profit or loss||Effect of carry-back|
|1 January 2009 to 31 December 2009||-£100,000||£50,000 can be carried back to 2006 leaving £50,000 loss to be carried forward to future accounting periods|
|1 January 2008 to 31 December 2008||-£190,000||£120,000 can be carried back (£70,000 to 2007 and £50,000 to 2006) leaving a loss of £70,000 to be carried forward to future accounting periods|
|1 January 2007 to 31 December 2007||£70,000||£70,000 loss from 2008 available to offset £70,000 profit|
|1 January 2006 to 31 December 2006||£100,000||£50,000 capped loss from 2008 and £50,000 loss from 2009 available to relieve £100,000 profit|
|1 January 2005 to 31 December 2005||£50,000||This profit can't be relieved under the extended loss measure. The 2008 losses £50,000 cap has already been fully used in 2006 and this year is beyond the three year carry back for 2009 losses|
You can make a claim to carry back a trading loss when you submit your Company Tax Return for the period when you made the loss.
Your claim should normally be made in your return or in an amendment to a return.
Please note: if you are making a claim in your return that reduces your Corporation Tax liability for an earlier period, you must make sure you have put an ‘X’ in the appropriate box on the CT600 form. This will alert HMRC to your claim and they can process it correctly.
If you're too late to make your claim in your return or return amendment for an accounting period, you can make your claim in a letter. A claim should be made within two years of the end of the accounting period when you made the loss. Your claim should include:
If you send your claim separately, send it to your Corporation Tax Office.
You can amend your claim in the same way as you can amend your return - see the link below for more information.
If HMRC doesn't carry out a compliance check into your return or stand alone claim, or any later amendment, then the amount of the loss becomes final. But HMRC can ask about the usage of the loss in a future return - for example, to check whether the same trade is still being carried out.
If you're offsetting a loss against an accounting period where you've already paid the tax due, HMRC will send you a repayment. However, if you owe any Corporation Tax, this will be deducted from the payment first.
If your company or organisation stops trading, you may be able to claim Terminal Loss Relief. This allows you to carry back any trading losses that occur in the final accounting period to be set off against profits made in any or all of the previous three years. But for each year, you can only offset the loss against the profits in that year if your company or organisation was carrying on the same trade at some point in the accounting period or periods that fall in that year.
If the accounting period end date has changed, or any of the preceding accounting periods in that three-year period are less than 12 months, then you'll have to apportion the profit. The loss can only be offset against that portion of the profits falling within the three-year period.
Any loss must be offset first against the profits of most recent years before being carried back to earlier years.
HMRC has announced measures to prevent companies getting Terminal Loss Relief when the trade is transferred to another person and the sole or main reason for that transfer is to get Terminal Loss Relief.
You should normally make your claim in your return or in an amendment to a return. But if you're too late to do this for an accounting period, you can make your claim in a letter. You should make your claim within two years of the end of the accounting period when you made the loss. Your claim should include:
Either send your claim with your return, or if you send it separately, send it to your Corporation Tax Office.
If both of the following apply, you may receive a repayment from HMRC:
However, this will depend on your other Corporation Tax liabilities.
When your company or organisation sells or disposes of a capital asset, it might make a loss instead of a profit. But these capital losses are treated differently from trading losses and cannot be offset against trading income.
Your company or organisation might earn property income if, for example, it rents out business or other premises. Separate rules apply to losses on property income. These losses:
If the company or organisation is a member of a group then losses on property income can be offset against profits of other members of the group, but only if the overall result of the company is a loss.