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HMRC internal manual

Company Taxation Manual

Corporation tax: CT loss reform: commencement: example 6: company makes overall profit in the AP straddling 1 April 2017: carried-forward losses relieved in the period and group relief

Before reading this example, please check the note concerning examples at CTM04900, which sets out the key assumptions made.

Introduction

The following example shows how a claim to group relief for losses arising in the year other than NTLRDs (CTM04920) is treated where the company makes an overall profit and there are losses brought forward.

Because there are losses brought forward, the profits and reliefs for losses arising in the straddling period need to be apportioned in order to determine the amount of the brought forward losses unused at 31 March 2017 and the amount that can be used in the part of the accounting period that falls from 1 April 2017.

Except in the case of NTLRDs arising, a claim for group relief for losses arising in the accounting period has to be made for the entire straddling accounting period. In a situation where the profits of the pre-1 April 2017 period are relieved in full by the brought forward losses, it won’t be possible to use group relief in that part of the accounting period. Only relief that is apportioned to the post-1 April 2017 period will be effective.

A claim for group relief for the straddling accounting period would usually be apportioned to the pre- and post-1 April 2017 periods on a time basis, resulting in the amount apportioned to the pre-1 April 2017 period remaining unused. HMRC accept that this may produce a result that is unjust or unreasonable and where this occurs, an alternative basis for apportionment may be used that produces a result that is just and reasonable. In these circumstances, HMRC will accept that a group relief claim made for the straddling accounting period in an amount up to a certain limit can be apportioned entirely to the post 1-April 2017 period. The limit is that part of the surrenderable amount for the period that if apportioned on a time basis would be apportioned to the second notional period. The following example demonstrates the point.

Example

In its accounting period from 1 January 2017 to 31 December 2017, Company F has:

  • Trade profits of £24,000,000,
  • Trade losses brought forward of £16,000,000 Company F also wishes to claim group relief from a group company, Company Z. Company Z has the same accounting period as company F and its surrenderable amount for the accounting period is £16,000,000.

Step 1

Apportion in-year profits to two notional periods, the first beginning 1 January 2017 and ending 31 March 2017, the second beginning 1 April 2017 and ending 31 December 2017. At this stage, group relief has not been apportioned to the notional periods as it isn’t known if apportionment on a time basis produces a result that is unjust or unreasonable.

1/1/17 to 31/3/17 £
Trade Profits 6,000,000
   
1/4/17 to 31/12/17  
Trade Profits 18,000,000

 

Step 2

Calculate the net result for the first notional period.

1/1/17 to 31/3/17 £
Trade profits 6,000,000
Trading losses brought forward and used in this notional period (6,000,000)
Net profits nil

 

Company Z has the same accounting period as company F and its surrenderable amount for the accounting period is £16,000,000. If this amount was surrendered to company F and apportioned on a time basis, the amount allocated to the first notional period would be £4,000,000 and the amount to the second notional period £12,000,000.

As the trade profits for the first notional period will be reduced to nil by trade losses brought forward, the group relief can not be used in that period. HMRC accepts that this is a result that is unjust or unreasonable.  Instead, company F claims group relief for the part of the surrenderable amount that can be used in the second notional period, £12,000,000. HMRC accepts that this can all be apportioned to the second notional period as this produces a result that is just and reasonable.

 

Step 3

Calculate the relevant maximum for the second notional period, in accordance with the loss restriction.

1/4/17 to 31/12/17 £
Modified total profits (CTA10/S269ZF(3) step 1) 18,000,000
Less amounts deducted from total profits (excluding brought forward property losses) (S269ZF(3) steps 2 and 4):  
Group relief (12,000,000)
Qualifying trade profits (S269ZF(3) step 5) 6,000,000
Relevant trade profits and relevant profits (S269ZF(2) CTA10/S269ZFA)  
(assume no deductions allowance) 6,000,000  
  Relevant maximum (S269ZD(4)) 3,000,000

 

Step 4

Calculate the net result for the second notional period.

1/4/17 to 31/12/17 £
Trade profits 18,000,000
Less:  
Trade losses (3,000,000)
Group relief (12,000,000)
Net profits 3,000,000

 

Step 5

Compute the profits chargeable to Corporation Tax for the straddling accounting period.

1/1/17 to 31/12/17 £
Trade profits 24,000,000
Less:  
Trade losses (9,000,000)
Group relief (12,000,000)
Profits chargeable to Corporation Tax 3,000,000

Trade losses of £7,000,000 are carried forward to the period commencing 1 January 2018. These are pre-1 April 2017 losses.