HMRC internal manual

Banking Manual

BKM310100 - Bank loss restriction: example of calculation of carried-forward reliefs available: rules applying for periods from 1 April 2015 to 31 March 2017

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The following is a general example that runs through the whole process from a calculation under CTA10/S269CD to a tax calculation under CTA10/S4.  The example shows the application of the 25% restriction in deductions for relevant carried-forward losses which applies for accounting periods beginning on or after 1 April 2016.

A Limited has the following income and reliefs

Carried-forward reliefs

  • trading losses: pre-2015 carried-forward trading losses - (£300), accrued on or after 1 April 2015 - (£50)          
  • non-trading loan relationship deficits: pre-2015 carried-forward non-trading deficits - (£20)
  • UK property losses - (£50)
  • capital losses - (£10)

Results for the period

  • trading profits - £250
  • income from a UK property business - £100
  • non-trading loan relationship deficit - (£50)
  • miscellaneous losses - (£20)
  • group relief available from fellow group company - (£50)
  • chargeable gains - £60

The normal rules still apply to the use of the brought forward amounts so the trading losses must be used against profits of the same trade, the UK property losses will be available against total profits, and the non-trading loan relationship deficits must be set against non-trading profits.  However the restriction will define the amount of the pre-2015 carried forward trading losses and non-trading deficits that will be automatically off-set when A ltd performs its tax calculation (see BKM303200).

The amount of in-year relief the company can claim is based on the profits without including the relevant reliefs so, in effect, they could displace the relevant carried-forward losses (see BKM304800).

Calculate the amount of carried-forward reliefs that can be used

Step 1 - calculate the banking company’s total profits for the period ignoring restricted reliefs

  • Trading profits of £250 less unrestricted trading losses brought forward (£50) gives trading profits of £200.
  • Chargeable gains of £60 less unrestricted capital losses brought forward (£10) gives chargeable gains of £50.
  • Add trading profits of £200, UK property business income of £100 and chargeable gains of £50 to give total profits of £350.

Step 2 - divide the result into trading and non trading profits

  • Trading profits are £200 as at step 1. This is deducted from total profits of £350 to give non-trading profits of £150.

Step 3 - calculate the trading and non-trading proportion

  • The trading profit proportion is £200/total profits of £350 = 57%.  
  • The non-trading proportion is £150/total profits of £350 = 43%.

Step 4 - calculate relief against total profits

  • The company intends to claim the non-trading loan relationship deficit of the period against its own profits and to claim the £50 group relief available.  The UK property business losses are automatically deducted from total profits.
  • Total reliefs are therefore the £50 non-trading loan relationship deficit, the £50 UK property business losses brought forward and the £50 group relief giving a total of £150.

Step 5 – calculate relevant trading profits

  • Multiply total reliefs of £150 by the trading proportion calculated at step 3 - 57% = £86. 
  • The £86 is deducted from the £200 trading profit to give relevant trading profits of £114.
  • The maximum pre-2015 carried-forward trading losses that can be set off against trading profits are 25% of £114 = £29.

Step 6 – calculate relevant non trading profits

  • Multiply total reliefs of £150 by the non-trading proportion calculated at step 3 - 43% = £64. 
  • The £64 is deducted from the £150 trading profit to give relevant non-trading profits of £86.
  • The maximum pre-2015 carried-forward non-trading losses that can be set off against non-trading profits are 25% of £86 = £21.

Step 7 – calculate relevant profits

  • Add together relevant trading profits of £114 and relevant non-trading profits of £86 to give total relevant profits of £200.
  • The maximum pre-2015 carried-forward management expenses that can be set off against total relevant profits are 25% of £200 = less the sums given at steps 5 and step 6.

The miscellaneous losses are not included as they cannot be relieved against the total income of the company and must be carried forward.

Apply restriction to the relevant profits

A company with carried-forward reliefs must use them up to the maximum restricted amount allowed by the calculation. The existing rules for claiming carry forward non-trading deficits on loan relationships still apply.  In this example the company has £300 of pre-2015 carried-forward trading losses and will deduct £29 and the £50 unrestricted carried forward trading losses.  The company has only £20 of pre-2015 carried-forward non-trading deficits which is less than 25% of relevant non-trading profits so the company will deduct the full £20.

A Ltd has used £49 of its £50 total relevant profits but does not have any pre-2015 management expenses to set agains the balance of £1.

Calculate the profits chargeable to corporation tax

The total profits chargeable to tax are:

  • Trading profits of £250 less trading losses brought forward of £79 (£29 restricted and £50 unrestricted) = £171
  • UK property business income of £100 plus chargeable gains of £50 (£60 less capital losses brought forward of £10) less non-trading deficits brought forward of £20 = £130.
  • This gives total profits of £171 + £130 = £301.
  • The reliefs to be deducted from total profits are the same as those included at step 4 of the calculation above.  These are the £50 non-trading loan relationship deficit, the £50 UK property business losses brought forward and the £50 group relief - a total of £150. 
  • Taxable total profits are total profits of £301 less total reliefs of £150 = £151.

Any subsequent changes to the tax calculation that affect relevant profits will entail a re-calculation of the amount allowed under the restriction (for example, the company chooses not to claim the group relief).  A claim to carry back relief from future periods would not be such a change (see BKM306350).

Allow any reliefs carried back

If the company should make a loss in the following year that is available for carry back it can then set it against the £151 under the current rules without any need for a recalculation of the amount of relevant relief available (see BKM306300).