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HMRC internal manual

Banking Manual

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

BKM310200 - Bank loss restriction: example of calculation of carried-forward reliefs available: rules applying for periods from 1 April 2017

CTA10/S269ZF

The following is a general example that runs through the whole process from a calculation under CTA10/S269ZF to a tax calculation under CTA10/S4.

The example shows the application of the 25% restriction on deductions for relevant carried-forward losses (BKM303150) which applies for accounting periods beginning on or after 1 April 2016. The example also shows the application of the general loss restriction (CTA10/PART7ZA), which applies from 1 April 2017 and restricts the relief that companies of all types, including banks, may be able to obtain for a broader range of carried-forward losses, regardless of when they were incurred.

Example: A Limited

In its period from 1 January to 31 December 2022, A Ltd, a banking company, has the following income and reliefs:

Carried-forward reliefs:

Pre 1 April 2015 BLR losses: Carried-forward trading losses accrued before 1 April 2015, carried forward under CTA10/S45 for relief against profits of the same trade £500m
   
1 April 2015 – 31 March 2017: Carried-forward trading losses accrued in periods from 1 April 2015 to 31 March 2017, carried forward under CTA10/S45 for relief against profits of the same trade £70m
Post 1 April 2017: Carried-forward trading losses accrued from 1 April 2017, carried forward under CTA10/S45A for relief against total profits £90m

 

Results for the period:

Trading profits £485m
   
UK property business profits £120m
Group relief available from fellow group company £20m

 

The bank loss restriction will define the amount of the pre-2015 carried forward trading losses that can be deducted from trading profits when A Ltd performs its tax calculation (see BKM305000).

The general loss restriction will define the total amount of restricted carried-forward losses that can be deducted from the company’s profits.

Assume for the purposes of the example that:

 

  • The carried-forward trading losses arose in the same trade as carried on in the accounting period ended 31 December 2022
  • The company has been assigned the full amount of the group’s £5m deductions allowance for the period, and
  • The company allocates all of its deductions allowance and in-year reliefs to its trading profits.  

After the above is taken into account, the company prioritises use of losses in the following order:

  • Pre-1 April 2015 losses,
  • Losses accrued in periods from 1 April 2015 to 31 March 2017,
  • Post-1 April 2017 losses.

In practice we would expect this banking company to prioritise the use of any losses that accrued after 1 January 2016 because these are available to reduce profits subject to the bank surcharge.

1. Calculate modified total profits (CTA10/S269ZF(3) step 1)

This is the total profits of £485 million trading profits plus £120 million UK property business profits, before deduction of the in-year group relief or of restricted carried-forward losses.

This gives £605 million.

Trading profits £485m
   
plus UK property business profits £120m
Modified total profits £605m

 

2. Divide modified total profits into trading profits and non-trading profits (CTA10/S269ZF(3) step 3)

Trading profits are £485 million and non-trading profits are £120 million.

Trading profits £485m
   
Non-trading profits £120m

 

3. Deduct in-year reliefs to find the qualifying trading profits and qualifying non-trading profits (CTA10/S269ZF/(3) steps 2, 4 and 5)

The only in-year relief available is the £20 million group relief surrendered from a fellow group company.

A Ltd allocates the full £20 million of this relief to its trading profits, to give:

Trading profits £485m
   
less group relief (£20m)
Qualifying trading profits £465m

 

Non-trading profits £120m
   
less in-year reliefs (£0m)
Qualifying non-trading profits £120m

 

4. Subtract any deductions allowance and identify relevant trading profits, relevant non-trading profits and relevant profits (CTA10/S269ZF(1) to (2), CTA10/S269ZD(5), S269ZF(1) and (2))

The company has been allocated the whole amount of the group’s £5 million deductions allowance. It allocates this entirely to its trading profits. This gives £5 million trading profits deductions allowance and nil non-trading profits deductions allowance.

Relevant profits are therefore as follows:

Qualifying trading profits £465m
   
less trading profits deductions allowance (£5m)
Relevant trading profits £460m

 

Qualifying non-trading profits £120m
   
less non-trading profits deductions allowance (£0m)
Relevant non-trading profits £120m

 

Relevant trading profits £460m
   
plus Relevant non-trading profits £120m
Relevant profits £580m

 

5. a) Calculate the relevant maximum – trading profits

i) Bank loss restriction

In accordance with the bank loss restriction, the company can use pre-1 April 2015 carried-forward trading losses against 25 percent of the amount of its relevant trading profits.

Relevant trading profits £460m
   
Multiply by 25% £115m

 

The company relieves £115 million of its trading losses accrued before 1 April 2015, carried forward under CTA10/S45, against its trading profits. This is the maximum amount of relief the company can obtain for these losses in this period.

Carried-forward trading losses accrued before  1 April 2015, used in period to 31 December 2022 £115m
   
Carried-forward trading losses accrued before 1 April 2015, carried forward under CTA10/S45 for relief against profits of the same trade:  (£500m less £115m) £385m

 

ii) General loss restriction

In accordance with the general loss restriction, the relevant maximum for trading profits is
 

Relevant trading profits £460m
   
Multiply by 50% £230m
Plus Trading profits deduction allowance £5m
Relevant maximum – trading profits £235m

 

The relevant maximum for trading profits is £235m. However, the company has already relieved £115 million trading losses carried forward against profits of the same trade at point 5. a) i). The general loss restriction sets an overall limit, so this leaves a further £120 million profits that can potentially be relieved using carried-forward trading losses that accrued between 1 April 2015 and 31 March 2017.

Relevant maximum - trading profits £235m
   
less carried-forward trading losses accrued before  1 April 2015, used in period to 31 December 2022 (£115m)
Remaining capacity – that can be relieved using carried-forward trading losses accrued 1 April 2015 to 31 March 2017  £120m

 

The company has £70 million carried-forward trading losses accrued in periods from 1 April 2015 to 31 March 2017, carried forward under CTA10/S45 for relief against profits of the same trade. These losses are subject to the relevant maximum for trading profits but, because they accrued from 1 April 2015, they are not subject to the bank loss restriction.

Since £70 million is within the £120 million unused part of the relevant maximum for trading profits, the company is able to deduct the full amount of its £70 million carried-forward trading losses accrued in periods from 1 April 2015 to 31 March 2017 from its profits of the same trade. It does so.

Losses accrued 1 April 2015 to 31 March 2017  used in period to 31 December 2022  £70m
   
Carried-forward trading losses accrued in periods from 1 April 2015 to 31 March 2017, carried forward under CTA10/S45 for relief against profits of the same trade £0m

 

In total, this means that the company deducts £185 million trading losses carried forward against profits of the same trade.  This figure comprises £115 million pre-1 April 2015 trading losses, subject to both the bank loss restriction and the general loss restriction, and a further £70 million post-1 April 2015 pre 1-April 2017 trading losses subject to the general loss restriction only.

 

Carried-forward trading losses accrued before  1 April 2015 used in period to 31 December 2022 £115m
   
plus  Carried-forward trading losses accrued 1 April 2015 to 31 March 2017 used in period to 31 December 2022 £70m
Total deducted from trading profits £185m

 

5. b) Calculate the relevant maximum – non-trading profits

In this example, the company does not have any non-trading loan relationship deficits so in practice it does not need to calculate the two restrictions as they apply for non-trading profits. However, the calculations are included for completeness.

i) Bank loss restriction

 In accordance with the bank loss restriction, the company can use pre-1 April 2015 carried-forward non-trading loan relationship deficits against 25 percent of the amount of its relevant non-trading profits.

Relevant non-trading profits (point 4) £120m
   
Multiply by 25% £30m

 

ii) General loss restriction

In accordance with the general loss restriction, the relevant maximum for trading profits is:

Relevant non-trading profits £120m
   
Multiply by 50% £60m
Plus Non-trading profits deduction allowance £0m
Relevant maximum – non-trading profits £60m

 

The general loss restriction sets an overall limit, so if the company had relieved any losses at point 5. b) i) above, it would need to deduct these to find the amount of profits that could potentially be relieved using post-1 April 2015 non-trading loan relationship deficits carried forward against non-trading

 

5. c) Calculate the relevant maximum – total profits

i) Bank loss restriction

The company does not have any pre-1 April 2015 carried-forward management expenses. However, if it did have management expenses of this type, in accordance with the bank loss restriction, it would calculate the amount of pre-1 April 2015 carried-forward management expenses it can use as follows:

Relevant profits (point 4) £580m
   
Multiply by 25% £145m
Less trading losses carried forward under CTA10/S45 against profits of the same trade used in period to 31 December 2022 (5a)(ii) (£185m)
trading losses carried forward under CTA10/S45B against profits of the same trade used in period to 31 December 2022 £0m
NTLRDs carried forward under CTA09/s457 against non-trading profits used in period to 31 December 2022 £0m
  (£40m)

 

As the result is a negative number the company would have no capacity to relieve pre-1 April 2015 carried-forward management expenses.

ii) General loss restriction

In accordance with the general loss restriction, the relevant maximum for total profits is the sum of

Relevant profits (point 4) £580m
   
Multiply by 50% £290m
plus Trading profits deduction allowance £5m
Relevant maximum – total profits £295m

 

However, the company has already deducted a total of £185 million carried-forward losses at points 5. a) i) and ii) above. Since the relevant maximum for total profits is an overriding upper limit for the use of all carried-forward losses of types that are subject to the general loss restriction, the company needs to deduct these from its relevant maximum. This gives the company’s remaining capacity to use restricted carried-forward losses against its total profits.

If the company had deducted any losses at point 5. b), it would need to subtract these as well as losses deducted at 5. a) from its relevant maximum in order to find its remaining capacity to use restricted carried-forward losses against its total profits.

Relevant maximum - total profits £295m
   
less  Pre 1 April 2017 carried-forward trading losses deducted from trading profits (5a)(ii)) (£185m)
Pre 1 April 2017 NTLRDs carried forward under CTA09/s457 deducted from total profits in period to 31 December 2022 £0m
Pre 1 April 2015 management expenses deducted from total profits in period to 31 December 2022 £0m
Remaining capacity £110m

 

The company has £90 million trading losses accrued from 1 April 2017, carried forward under CTA10/S45A for relief against total profits.

Since £90 million is within the £110 million unused part of the relevant maximum, the company is able to deduct the full amount of its £90 million carried-forward trading losses accrued from 1 April 2017 from its total profits. It does so.

If so, it should deduct these from its relevant maximum for total profits to determine what further capacity it has to relieve carried-forward losses against total profits.

Carried-forward trading losses accrued from 1 April 2017, carried forward under CTA10/S45A for relief against total profits – used in period to 31 December 2022 £90m
   
Carried-forward trading losses accrued before 1 April 2015, carried forward under CTA10/S45 for relief against profits of the same trade:  (£90m less £90m) £0m

 

6. Calculate profits chargeable to Corporation Tax

The total profits chargeable to tax are:

Trading profits £485m
   
less trading losses carried-forward under CTA10/S45 (5a)(ii)) (£185m)
  £300m
plus UK property business profits £120m
Total profits £420m

 

Taxable total profits are:

Total profits £420m
   
_less_   group relief (£20m)
post-1 April trading losses carried forward under CTA10/S45A (£90m)
Taxable total profits £310m

 

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).

If the company should make a loss in the following year that is available for carry back it can then set it against the £310 million without any need for a recalculation of the amount of relief available for carried-forward losses (see BKM306300).