CTM05060 - Corporation tax: restriction on relief for carried-forward losses: in-year reliefs

CTA10/S269ZF(3) Step 2 and S269ZF(5)

In-year reliefs are deducted from modified total profits (CTM05040) when calculating qualifying profits (CTM05070).

In-year reliefs are any amounts that can be set against a company’s total profits under CTA10/S4(2) Step 2, except for certain excluded deductions (defined below) (CTA10/S269ZF(3) Step 2 and CTA10/S269ZF(5)). In-year reliefs include amounts that can be deducted as group relief under CTA10/PART5.

In-year reliefs do not include capital losses of the accounting period. These are deducted from chargeable gains under TCGA92/S2A(1)(a) and not total profits. Capital losses of the period are deducted in calculating the amount of chargeable gains that are included in modified total profits (CTM05040).

The legislation does not explicitly refer to in-year reliefs. However, broadly, the effect of excluding the deductions listed at s269ZF(5) (the excluded deductions) is to remove losses carried forward or back from earlier or later periods that could be deducted from total profits. This means that the deductions the company is left to allocate at this stage will generally be losses, deficits and similar amounts that the company will deduct from total profits of the same period.

If the company has carried-forward losses that can only be set against certain types of income (for example, pre-1 April 2017 trading losses that can only be set against trading income) for periods before 1 April 2020, the in-year reliefs must be allocated between the company’s trading and non-trading profits (CTM05050). From 1 April 2020, the in-year reliefs must be allocated between trading profits, non-trading income profits and chargeable gains. The company may choose how its in-year reliefs are allocated. However, the company cannot allocate its in-year reliefs in a way that reduces either the trading profits, non-trading income profits or chargeable gains below nil.

For example, in an accounting period ending 31 December 2018, a company might have modified total profits of £12 million, comprising £10 million trading profits and £2 million non-trading profits. If this company has £4 million in in-year reliefs, it could, for example, allocate the whole £4 million to its trading profits, or it could allocate up to £2 million to its non-trading profits and the remainder to its trading profits. However, the company could not allocate more than £2 million in-year reliefs to its non-trading profits, as this would reduce the non-trading profits below nil.

If there are no losses of the type that can only be set against certain types of income, allocation of the in-year reliefs between trading and non-trading profits is not needed.

Excluded deductions

Excluded deductions for an accounting period are deductions for:

  • Carried-forward losses that can be deducted from total profits, and that are subject to the restriction (CTA10/S269ZD(3)). For example, carried-forward trade losses that are set against total profits under CTA10/S45A, or amounts claimed as group relief for carried-forward losses under CTA10/PART5A.
  • Trading losses carried back from a later accounting period under CTA10/S37(3)(b).
  • Terminal carried-forward losses relieved under CTA10/S45F.
  • Excess capital allowances for special leasing carried back from a later accounting period under CAA2001/S260(3).
  • Non-trading loan relationship deficits carried back from a later accounting period under CTA09/S463E.

Note that streamed losses (CTM05020), such as non-trading loan relationship deficits carried forward under CTA09/S457(3) for relief against non-trading profits only, have already been removed from the calculation of relevant maxima, before the company reaches this point. This was one of the effects of the legislation at S269ZF(3) Step 1 and S269ZF(4), which calculate the company’s modified total profits (CTM05040).

Reliefs subject to a claim

Some amounts are only available to set against total profits if the company makes a claim.

Where this is the case, the amount will only be included as part of the in-year reliefs figure if that claim is actually made.

For example, if a company has incurred trading losses in its accounting period ending 31 December 2018, these will only be included amongst the company’s in-year reliefs if the company makes a claim under CTA10/S37 to deduct those trading losses from profits of the same period. If the company does not make such a claim, its trading losses of the period will not be set against total profits of the period, and will not be included in the figure for its in-year reliefs.

If a company makes changes to its claims, it will usually need to recalculate its relevant maxima to reflect the changed amount of in-year relief.

Next step

Once the company has allocated its in-year reliefs, the next step is to find:

  • for periods to 1 April 2020, the qualifying trading and non-trading profits
  • for periods from 1 April 2020, the qualifying total profits, trading profits, non-trading income profits and chargeable gains (CTM05070).