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HMRC internal manual

Company Taxation Manual

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Corporation Tax: trading losses - relief against total profits: preceding accounting periods: cessation of trade - example showing loss carry back

This example shows how the rules for carry back of losses on cessation of trading (CTM04520) work.

Company L ceased trading on 31 March 2000. Its results showed:

### Accounting period (AP) ### Trade profit ### Trade loss
     
4 months to 31 March 2000   £18,000
12 months to 30 November 1999   £28,000
12 Months to 30 November 1998   £1,000
12 Months to 30 November 1997 £28,000  
12 Months to 30 November 1996 £11,000  
12 Months to 30 November 1995 £3,000  

Company L has no other profits. A claim was made under CTA10/S37 (CTM04505) to carry the 1998 loss back against the 1997 profits.

Claims are now made to carry back the losses on cessation back under the three-year rule in CTA10/S39 (2) and (3).

The losses on cessation of trade are those which arise in the 12 months prior to cessation and in this case are made up of two parts.

The loss arising in the AP falling wholly in the 12 months before cessation (AP 1 December 1999 to 31 March 2000)   £18,000
     
The proportion of the loss arising in the AP falling partly in the 12-month period (AP ended 30 November 1999) 244 / 365 x £28,000 £18,718
Total   £36,718

Relief for the loss of the earlier period (£18,718 for AP ended 30 November 1999) must be given before the loss of the later period (£18,000 for AP ended 31 March 2000).

The rest of the loss arising in the AP ending 30 November 1999 (£9,282) is not part of the loss within 12 months of the cessation of the trade. If there had been profits in the AP ended 30 November 1998 it could have been carried back under the normal CTA10/S37 rule. However it cannot figure in the three year carry back rule on cessation.

The losses of the APs that fall wholly or partly in the 12 months before cessation must be looked at in turn. The usual rule that the losses of earlier APs must be relieved before the losses of later APs (CTM04505 and the example at CTM04550) applies.

AP 1 December 1998 to 30 November 1999

Proportion of loss falling into 12 months before cessation £18,718  
     
APs falling wholly or partly in the 3-year period prior to 1 December 1998 are:    
30 November 1998   No profits
30 November 1997 Profit £28,000  
  Less loss from 1998 £1,000 £27,000
30 November 1996   £11,000
So the £18,718 loss for AP ended 30 November 1999 can be used as below    
30 November 1998   NIL
30 November 1997   £18,718
30 November 1996   NIL

If the proportion of the 1999 loss that fell into the 12 months prior to cessation had exceeded 27,000, that part could be carried back to AP ended 30 November 1996. This is because the whole of AP ended 30 November 1996 falls in the three-year period prior to 1 December 1998. However, none could be carried back to the AP ended 30 November 1995 because that falls wholly outside the three-year period. If, instead of an AP for 12 month ended 30 November 1996, Company L had an AP which straddled that date, CTA10/S39 (2) and (3) would operate together to limit the set-off to that part of the profits which fell in the three year period prior to 1 December 1998.

AP 1 December 1999 to 31 March 2000

Whole loss falls into the 12 months before cessation £18,000  
     
APs falling wholly or partly in the three-year period ending prior to 1 December 1999 are:    
30 November 1999   NIL
30 November 1998   NIL
30 November 1997 Profits £28000  
Less loss from AP ended 30 November 1998 £1,000    
Less loss from AP ended 30 November 1999 £18,718 £8,282  

So £8,282 of the loss from the AP ended 31 March 2000 can be carried back and set against the profits of the AP ended 30 November 1997. The balance of the 31 March 2000 loss £18,000 - £8,282 = £9,718 cannot be relieved.