A sometimes overlooked loss relief is available to companies where they cease trading and have made losses in the last 12 months.
The normal rules
Without ceasing to trade, if your company 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.
Terminal loss (TL) rules
The TL rules go much further than the normal rules above. Where a company has stopped trading and it has made a loss in its final 12 months of its trade the relief is extended as the company can carry back any trading losses that occur in the final 12 months of a trade and set them off against profits made in any or all of the three years up to the period when you made the loss.
The small print:
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 earlier accounting periods in that three year period are less than 12 months, then you’ll have to apportion the profit.
Any loss must be offset against the profits of most recent years first, before it can be carried back to earlier years. Losses must be made in the order they’re made, starting with the earliest.
Please follow this link for a detailed example of how the carry back works from HMRC's company taxation manual.
In addition to the above, the TL rules are also extended specifically for losses made since 1 April 2017. In this case the company may be able to claim Terminal Loss Relief for carried forward losses of that trade.
This is designed to give additional relief to companies and organisations that have been prevented from fully relieving profits of the final three years of a trade, due to restrictions on relief for carried forward losses.
The small print:
Terminal relief for carried forward losses of a trade is not subject to the restrictions on amounts that can be relieved using carried forward losses in periods from 1 April 2017.
Losses that can be used are trade losses carried forward to the final accounting period when the trade ceased. These losses can be used to reduce profits:
of the final accounting period
for earlier periods up to three years before the end of the final accounting period
Note that you can only use this relief to reduce profits of the three years ending with the end of the period in which trading stopped. This is not the same as the three year period that applies for losses that occur in the final 12 months of the trade.
If the final accounting period and final 12 months of trade begin on 1 January 2025 and end on 31 December 2025, the three year period for terminal relief for:
losses of the trade incurred in the final 12 months will begin on 1 January 2022 and end on 31 December 2024
carried forward losses of the trade will begin on 1 January 2023 and end on 31 December 2025.
In both cases, if one of the earlier accounting periods falls partly within and partly outside the three year period, then you’ll have to apportion the profit of that accounting period.
You cannot use terminal relief for carried forward losses of a trade to offset profits apportioned outside its particular three year period.
Any loss must first be offset against the profits of most recent years before being carried back to earlier years.
You can only claim this relief to reduce profits of periods from 1 April 2017.
You can only claim relief against profits for periods later than one when the loss you’re using was originally sustained, even if there are earlier periods within that three year period.
This applies to each amount of loss that’s been carried forward to the final period.
You cannot claim this relief to reduce profits for either:
the period in which the loss you’re using was originally sustained