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HMRC internal manual

Banking Manual

Bank loss restriction: calculation of carried-forward reliefs available: effect on the availability of other reliefs – an example

The following example demonstrates the effect of the bank loss restriction calculation on the availability of group relief. The example relates to the rules in force before 1 April 2017. From 1 April 2017, the rules for calculating the restriction are different, and align with the general loss restriction at CTA10/PART7ZA (see BKM305100 – 305600). However, the underlying principle, that carried-forward losses subject to the restriction can effectively be displaced by other relief, still applies post-1 April 2017.  

Amounts

B1 has the following income and reliefs in the year ended 31 March 2017:

* Pre-2015 carried-forward trading losses -£500
   
* Trading profits for the period £500

Another company in B1’s group has £300 available to surrender.

B1’s calculation of available total profits (CTA10/s140)

Assume that B1’s accounting period fully coincides with the surrendering company’s.

Under the existing rules, B1 can only claim group relief against its available total profits; that is:

  • Total profits after any relief automatically given or actually claimed, and
  • As reduced by any potential relief from trading losses or excess Capital Allowances of the period regardless of whether those are actually claimed.

Absent the restriction, the carried-forward trading losses would automatically be set against B1’s trading profits of the period.  A company like B1 but outside the restriction would hence have available total profits of £nil, so would not be able to claim any group relief.

Within the restriction, however, the amount of pre-2015 carried-forward trading losses available will depend on the banking company’s relevant profits.

Calculation of relevant profits (see BKM304300)

At step 1 of CTA10/S269CD B1 will calculate the total profits without taking account of the pre-2015 carried-forward trading losses.  This will be the £500 trading profits for the year.  There are no non-trading profits, so steps 2 and 3 will find £500 of trading profits and a trading proportion of 100%.

At step 4 B1 can decide it intends to claim up to £500 of relief in the actual tax calculation.  B1 decides it will claim the full £300 available from the other group company.

This means (following on to step 5) that B1 will have (£500 less £300) £200 of relevant trading profits.  According to CTA10/S269CA(2) B1 can therefore deduct a maximum of (25 percent of £200) £50 of pre-2015 carried-forward trading losses. 

Calculation of taxable total profits

B1 will calculate (under CTA10/S4(3)) that it has total profits of £500 trading profits less £50 of carried-forward trading losses: £450.

It can then claim the £300 of group relief, leaving taxable total profits (s4(2)) of £150.

Subsequent changes to the reliefs claimed

If B1 later decided to claim another £100 of group relief from another company in its group, this would require a revised calculation of relevant profits.

The result at step 5 for relevant trading profits would be (£500 less £400) £100.  B1 could therefore deduct (25 percent of £100) £25 of pre-2015 carried-forward trading losses.

So the calculation of taxable total income would be: total profits of (£500 less £25) £475; less group relief of £400, leaving £75 of taxable total profits.