CTM04960 - 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, refresh 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 group relief time apportioned to the pre-1 April 2017 period exceeds the profits of the period after deducting brought forward losses, that excess cannot be relieved as there are insufficient profits. Where this occurs, the group relief claimed for the accounting period should be limited to the sum of the amount (if any) that can be relieved in the pre-1 April 2017 period and the amount that is apportioned to the post-1 April 2017 period.

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. This may result in part of the whole 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 in this situation 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 calculated as above may be apportioned on a basis that results in the profits of the pre-1 April 2017 period being reduced to nil. 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,
• Non-trading loan relationship credits (NTLRCs) £6,000,
• Trade losses brought forward of £16,000,000Company 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 is not known whether 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
NTLRCs	1,500
	6,001,500
1/4/17 to 31/12/17
Trade Profits	18,000,000
NTLRCs	4,500
	18,004,500

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)
NTLRCs	1,500
Net profits	1,500

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 were 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, and the only other profits are NTLRCs of £1,500, the amount of group relief that can be used in that period is £1,500. The remaining £3,998,500 apportioned to the period cannot be used. HMRC accepts that this is a result that is unjust or unreasonable. Instead, company F can claim group relief equal to the amount that can be used in the first notional period, £1,500, and the amount apportioned to the second notional period, £12,000,000, which totals £12,001,500. HMRC accepts this alternative method of apportionment of £1,500 to the first notional period and £12,000,000 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)
Trading profits	18,000,000
NTLRCs	4,500
	18,004,500
Trade profits	18,000,000
Less amounts deducted from total trading profits (excluding brought forward trading losses) (S269ZF (3) steps 2 and 4) (all allocated to trading profits):
Group relief	(12,000,000)
Qualifying trade profits (S269ZF (3) step 5)	6,000,000
Relevant trading profits (S269ZF (1) CTA10 (assume no deductions allowance)	6,000,000
Relevant maximum (S269ZB (5)	3,000,000
Non-trade profits
NTLRCs	4,500
Qualifying non-trading profits and relevant non-trading profits (S269ZF (3) step 5 and S269ZF (2))
Relevant maximum (S269ZC (3))	2,250

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)
NTLRCs	4,500
	15,004,500
Group relief	(12,000,000)
Net profits	3,004,500

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)
NTLRCs	6,000
Group relief	(12,001,500)
Profits chargeable to Corporation Tax	3,004,500

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