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HMRC internal manual

Compliance Handbook

Penalties for Inaccuracies: Calculating the penalty: Losses impact on potential lost revenue calculation: Example - understatement of profits creates an aggregate loss

You must check the date from which these rules apply for the tax or duty you are dealing with. See CH81011 for full details.


Company D, E, F and G are a group of companies.


Their returned results are



D profits 110000 Less Group Relief 110,000 (110,000 surrendered by Company F)
E profits 160000 Less Group Relief 160,000 (90,000 surrendered by Company F + 70,000 by Company G)
F loss -200000  
G loss -85000  
Aggregate loss ( 15,000)  

Company D’s return is found to contain a careless inaccuracy of £40,000. Its true profit is £150,000.

Company F can and does withdraw its Group Relief surrenders to Companies D and E and makes new surrenders of £150,000 to Company D and £50,000 to Company E.

Company G can and does withdraw its surrender to Company E and makes a new surrender to Company E of £85,000.

The inaccuracy has the effect of creating the aggregate loss recorded for the group and so the potential lost revenue (PLR) is calculated using the rules for losses, see CH82341.

The losses rules apply to the amount of Company D’s understated profit and the PLR for the inaccuracy is calculated in the context of the aggregate loss position of the group.

Under the normal rules for calculating PLR, Company D’s PLR (assuming liability at the small companies’ rate) would be 40,000 x 21% = 8,400. Instead, the inaccuracy is considered in the context of the aggregate loss for the group. The PLR for company D’s penalty is

Normal rule      
Correct amount due or payable by D 150,000 profit    
Less 150,000 Group Relief    
Tax due Nil x 21% = Nil
Returned amount due or payable by D 110,000 profit    
Less 110,000 Group Relief    
Tax due Nil x 21% = Nil
PLR in respect of D     Nil
Correct amount due or payable by E 160000    
Less 135,000 Group Relief    
Tax due 25,000 x 21% = 5250
Returned amount due or payable by E 160000    
less 160,000 Group Relief    
Tax due Nil x 21% = Nil
PLR in respect of E     5,250
Unused loss rule      
15,000 x 10% =     1,500

Total PLR for Company D’s penalty = Nil + 5,250 + 1,500 = 6,750

Only £25,000 of the inaccuracy reduced group tax liability for the period. The balance created the group’s aggregate loss for the period.

In this example, at the time that the penalty is to be imposed, G has not made use of the surplus loss of £15,000 in a later or earlier period, so the PLR in respect of the £15,000 is calculated under the unused loss rule.

If Company G had used the surplus loss to reduce tax liability in another period, the PLR would be the additional tax due and payable when that loss was withdrawn.