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HMRC internal manual

Company Taxation Manual

Corporation tax: restriction on relief for carried-forward losses: example 1: company using only streamed carried-forward losses

Carried forward trading losses and non-trading loan relationship deficits (NTLRDs) that arise before 1 April 2017 are subject to the restriction, since this applies to restricted carried-forward losses regardless of when they arose (CTM05020). However, they will not be eligible for the relaxation on relief for carried-forward losses arising from 1 April 2017 (CTM04100). The trading losses will therefore only be available for relief against profits of the same trade, and the NTLRDs will only be available for relief against non-trading profits.

Although most post-1 April 2017 trading losses and NTLRDs benefit from the relaxation, in certain circumstances, this will not be the case (CTM04115). This may occur for example where a trade or investment business becomes small or negligible.

Where post-1 April 2017 trade losses or NTLRDs do not benefit from the relaxation, they too can be set only against profits of the same trade or non-trading profits, respectively.

Where a company has streamed trading losses carried forward, which can only be set against profits of the same trade, it is necessary to calculate the maximum amount of trading profits these losses can be used to relieve.

Likewise, where a company has streamed NTLRDs carried forward, which can only be set against non-trading profits, it is necessary to calculate the maximum amount of non-trading profits these deficits can be used to relieve.

The following example sets out the steps to take where a company uses only streamed restricted losses, and has no losses carried forward for relief against total profits.

Example

Company A has an accounting period ending 31 December 2020. In that period, its profits are as follows:

  • Trading profits of £20 million,
  • Property business profits of £8 million.

Its in-year reliefs (CTM05060) are:

  • NTLRDs of £2 million,
  • Group relief claimed from a group company of £5 million.

This gives a total of £7 million. It chooses to set £6 million against trading profits and £1 million against non-trading profits.

The company’s carried-forward losses as at the beginning of the period are:

  • Pre-1 April 2017 trading losses of £14 million,
  • Pre-1 April 2017 NTLRDs of £9 million.

The company has been allocated £3 million of its group deductions allowance and it chooses to set £1 million against trading profits and £2 million against non-trading profits.

The company is not a life insurance company.

Steps 1 to 4

The first four steps apply for the company’s calculation of its relevant maxima for trading and for non-trading profits.

1-  Calculate modified total profits (CTA10/S269ZF(3) Step 1, CTM05040). This is the total profits of £28 million before deduction of the in-year NTLRDs and group relief.

2-  Compute the in-year reliefs (CTA10/S269ZF(3) Step 2). These are amounts that can be deducted from total profits that are not excluded deductions. As above, these are the £2 million NTLRDs and the £5 million group relief, giving a total of £7 million.

3-  Divide the total profits into trading and non-trading profits (CTA10/S269ZF(3) Step 3, CTM05050). The trading profits are £20 million and the non-trading profits £8 million.

4-  Allocate the in-year reliefs between trading and non-trading profits (CTA10/S269ZF(3) Step 4, CTM05060). The company chooses to allocate £6 million to trading profits and £1 million to non-trading profits.

Relevant maximum for trading profits

The maximum amount of trading profits that can be set off using trading losses carried forward against profits of the same trade is computed as follows:

5-  Compute the qualifying trading profits (CTA10/S269ZF(3) Step 5, CTM05070). The qualifying trading profits are the trading profits of £20 million minus the £6 million of in-year relief allocated to trading profits, giving £14 million. 

6-  Compute the relevant trading profits (CTA10/S269ZF(1), CTM05080). These are the £14 million qualifying trading profits minus the £1 million trading deductions allowance, which gives £13 million.

Note that in this case, there is no need to calculate the overall relevant profits as there are no carried-forward losses that can be set against total profits.

7-  Calculate the relevant maximum for trading profits (CTA10/S269ZB(5), CTM05090). This is 50% of the relevant trading profits plus the trading profits deductions allowance:

£13 million x 50% + £1 million = £7.5 million.

This is the maximum amount of pre-1 April 2017 trading losses that can be deducted from trading profits of the period. Trading losses of this amount will be set off against the trading profits, unless the company chooses otherwise (CTM05090).

The company had £14 million trading losses carried forward at the start of the period and chooses to use the full £7.5 million allowable in accordance with the restriction. This leaves unused trading losses of £6.5 million, which will be carried forward to the next accounting period.

Relevant maximum for non-trading profits

The maximum amount of non-trading profits that can be set off by NTLRDs is computed as follows:

8-  Compute the qualifying non-trading profits (CTA10/S269ZF(3) Step 5, CTM05070). These are the non-trading profits of £8 million minus the in-year reliefs allocated to non-trading profits of £1 million, giving £7 million.

9-  Compute the relevant non-trading profits (CTA10/S269ZF(2), CTM05080).These are the £7 million qualifying non-trading profits minus the £2 million non-trading deductions allowance, which gives £5 million.

10-  Calculate the relevant maximum for non-trading profits (CTA10/S269ZC(3), CTM05090). This is 50% of the relevant non-trading profits plus the non-trading deductions allowance:

£5 million x 50% + £2 million = £4.5 million.

This is the maximum amount of pre-1 April 2017 NTLRDs that can be deducted from non-trading profits of the period. NTLRDs of this amount will be set against non-trading profits unless the company chooses otherwise (CFM32040).

The company had £9 million NTLRDs carried forward at the start of the period and chooses to use the full £4.5 million allowable in accordance with the restriction. This leaves unused NTLRDs of £4.5 million, which will be carried forward to the next accounting period.

Company’s profits chargeable to Corporation Tax

The company’s profits chargeable to Corporation Tax are calculated as follows:

£20 million trading profits less £7.5 million trading losses carried forward (deducted at CTA10/S4(3) Step 1) gives £12.5 million.

Add £8 million property business profits less NTLRDs carried forward of £4.5 million (deducted at CTA10/S4(3) Step 1) to give total profits of £16 million.

Less the following amounts, deducted at CTA10/S4(2) Step 2:

  • NTLRDs incurred in the same period of £2 million,
  • Group relief claimed from a group company of £5 million.

This gives profits chargeable to Corporation Tax of £16 - £7 = £9 million.