Accounting for current year and prior year relief for trading losses.
Generally, if a company incurs a trading loss in any accounting period it may claim to first offset that loss against its total corporation tax profits for the same accounting period.
The claim may also require that any unrelieved balance of the loss be carried back against total profits of the previous accounting period or periods, so far as they fall (wholly or partly) within the period of 12 months ending with the start of the loss-making period.
Restrictions on the use of losses can apply to companies with losses in excess of £5m from 1 April 2017.
Making an early claim
Due to the impact that Covid-19 has had on businesses, HMRC has now acknowledged that, in exceptional circumstances, claims for repayments of corporation tax for prior periods based on anticipated losses before the current accounting period has concluded will be considered.
As a result HMRC has updated their corporation tax guidance covering situations where a company seeks repayment of tax before a return has been filed.
Where a company knows that it has suffered large losses, it can seek relief for those losses against profits made in a previous profit-making period and reclaim the associated corporation tax that was paid over to HMRC.
The company must give notice to HMRC stating the amount which it considers should be repaid, together with the change of circumstances and grounds for believing that the amount paid exceeds the company’s probable liability to corporation tax.
The most common example of this will be a company that:
has paid tax for accounting period 1 (AP1)
during accounting period 2 (AP2) believes it will make a loss that it intends to carry back to AP1.
Until AP2 has ended, no allowable loss has crystallised and the company cannot anticipate losses/reliefs and obtain repayment. The reason for this is because loss relief claims under CTA10/S37 require that AP2 losses are first set against profits of that accounting period before the remainder can be carried back.
Until AP2 has ended, the full extent of the profits and losses of that accounting period also cannot be determined with any degree of certainty. This means that in practice it is very difficult to establish that a specified amount will be available for carry back and to produce an accurate revised calculation of liability.
After the end of AP2, however, HMRC may accept draft accounts or management accounts as evidence that the company has grounds for believing that it has paid too much tax.
Providing an acceptable form of evidence is therefore critical to the timely success of a repayment. Any submission to HMRC requesting the early carry back of losses will need sufficient evidence that losses will be included in the company tax return for the loss-making period when it is eventually submitted.
Terminal loss relief
Two types of terminal loss relief are available to corporates.
Terminal relief for losses in the final 12 months of trade
This relief allows a company to 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 of the loss. As normal, losses can only be set off if the company was carrying on the same trade and is claimed on a LIFO basis.
On a practical note, terminal loss relief has to be claimed. A claim must be made within two years of the end of the accounting period in which the loss was made. The claim is normally made within the tax return or an amended tax return.
2. Terminal relief for carried forward losses of a trade from 1 April 2017
From 1 April 2017, if a company stops trading, it may be able to claim terminal loss relief for carried forward losses of that trade.
This is designed to give additional relief to companies 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.
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.
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.