CTM05010 - Corporation tax: restriction on relief for carried-forward losses: introduction
CTA10/PART7ZA
Finance (No 2) Act 2017 introduced a restriction on the amount of relief that companies can obtain for carried-forward losses, at Part 7ZA of CTA10.
With effect from 1 April 2017, companies with profits in excess of any deductions allowance (which is a maximum of £5 million) are no longer able to reduce profits to nil by using relief for carried-forward losses. Broadly, a company’s profits after deduction of
- any in-year reliefs (reliefs of the year that are set against total profits such as group relief) (CTM05060), and
- the deductions allowance (CTM05120)
can only be reduced by up to 50% by carried-forward losses.
For example, a company with £12 million profit remaining after in-year reliefs that has access to the maximum £5m deductions allowance will be able to cover only a maximum of £8.5m profits by carried-forward losses (the £5m deductions allowance plus 50% of the remaining profits of £7m of profits). The result of this is that a company will pay tax on £3.5m.
Where a company is a member of a group (CTM05160), the deductions allowance is shared amongst the group members as they see fit. The allowance is allocated to companies that are members of the group by a nominated company.
There is no restriction if a company’s qualifying profits (CTM05070) are below the amount of that company’s deductions allowance. The qualifying profits are, very broadly, the company’s in-year profits less any in-year reliefs and any deductions for carried-forward allowable capital losses.
As a result, the restriction is unlikely to affect the amount of relief most small companies or groups are able to obtain for carried-forward losses.
A company should specify the amount of its deductions allowance in its tax return.
A company with streamed restricted carried-forward losses (CTM05020) will also need to show how it has allocated its deductions allowance between its trading and non-trading profits and, from 1 April 2020, its chargeable gains (CTM05080).
The restriction for trading losses, non-trading loan relationship deficits, management expenses, UK property business losses and non-trade losses on intangible fixed assets has effect for profits arising from 1 April 2017 but can apply to losses carried forward from any period, including losses carried forward at 1 April 2017.
The restriction for capital losses carried forward has effect for chargeable gains arising after 1 April 2020 and applies to carried forward losses from any period including losses arising before 1 April 2020.