Paragraph 39 extends the period over which the benefit of the
expense can be utilized in certain circumstances.
It comes into play when:
Where these conditions are met the loss created by the expense
and which is carried forward is treated as an expense of the next
accounting period and so is available to surrender as group relief.
Example 1
A Ltd draws up accounts to 31 December. The company is
carrying on a business of leasing plant or machinery and there is a
qualifying change of ownership on 4 December 2009 when the company
is sold to the X Group. The relevant day is 4 December 2009.
As a consequence of the sale A Ltd is required to bring its
accounting period to an end on 4 December 2009 and a new accounting
period starts on 5 December 2009 (AP1). The company computes an
income and corresponding expense amount of £100m. £100m
is an expense of AP1 which runs from 5 December to 31 December
2009, a period of less than one month. A Ltd computes its profits
for the period ended 31 December 2009 and finds it now has a loss
of £98m.
The X Group draws up accounts to 31 December so that the
corresponding accounting period for group relief purposes is the
period to 31 December 2009. The X group has profits in the period
of only £48m and so they are insufficient to utilize the
£98m loss so, but for paragraph 39 Schedule 10 FA 2006, the
remaining loss (£50m) would be carried forward into AP2 (year
ended 31 December 2010) and . In AP 2 its use would be limited to
set off against profits of the same trade but for paragraph 39
Schedule 10 FA 2006.
The loss is a loss of the new accounting period – AP1
– and it is not utilized but carried forward into the
subsequent accounting period – AP2.
AP 2 starts within 12 months of the relevant day – 4
December 2009 – and A Ltd is therefore able to treat that
part of the loss that derives from the expense as an expense of the
subsequent accounting period – AP2.
The whole of the loss remaining of £50m is derived from
the expense and so A Ltd can compute the profits of AP2 with a
further deduction of £50m.
There are rules to ensure that only that part of the carried
forward loss that is attributable to the expense is afforded this
special treatment. And for this purpose the expense is treated as
the final amount to be deducted. This is illustrated in the
following examples.
Example 2
Say in example 1 there is already a loss of £120m in AP1
before the deduction of the expense of £100m. The final loss
of AP1 is £220m. £48m is utilized as group relief in AP1
leaving £172m to carry forward into AP2.
Not all of the £172m loss is derived from the expense.
The company must compute the loss of AP1 treating the expense as
the final amount to be deducted.
As the £172m exceeds the £100m expense amount only
£100m is treated as an expense of AP2.
Example 3
Say in example 1 there is a profit of £10m in AP2. The
residual loss of £50m carried forward from AP1 would normally
reduce these profits to nil with the remaining £40m being
carried forward to AP3.
The position before deduction of the SCH 10 expense in AP1
was a profit of £2m so the loss of £98m derives from the
expense. The X group can utilise £48m of this loss in the
period to 31 December 2009, leaving £50m treated as an expense
of AP2. This turns the profit of £10m to a loss of £40m
which is available to utilise as a loss of that accounting period,
and so is available for group relief.
Example 4
Say in example 1 there is a further qualifying change of
ownership of A Ltd on 17 March 2010. AP2 will be terminated on 17
March 2010 and a new accounting period (AP3) will start on 18 March
2010 and run to 31 December 2010. AP3 is a ‘subsequent
accounting period’ that starts within 12 months of the
relevant day (5 December 2009) but it starts as a result of a
qualifying change of ownership and therefore the special treatment
of a loss carried forward into the accounting period cannot
apply.
