CFM32045 - Loan relationships: non-trading deficits: carry foward - Examples

Example 1

In an accounting period beginning on 1 January 2016, a UK company received an overseas dividend of £200,000, with foreign tax paid of £36,000, and UK trading profits of £50,000.

In the previous accounting period, it had a non-trading deficit of £300,000 to be carried forward under CTA09/S457.

Although the company has trading profits, as the non-trading deficits arose in an accounting period beginning before 1 April 2017, the carried forward non-trading deficits cannot be set against the trading profits.

In order to maintain maximum foreign tax credit relief the company claims under CTA09/S458(1) to set only £20,000 of the non-trading deficits brought down against the non-trading profits of the period. The unutilised £280,000 deficits are carried forward to set against the non-trading profits of the following period.

  • Dividend - £200,000
  • Part deficit cf - minus £20,000
  • Net non-trading Profits - £180,000
  • Trading profits - £50,000
  • Chargeable profits £230,000
  • CT@20% - £46,000
  • Double taxation tax credit relief - £36,000
  • CT payable £10,000

Double taxation relief is limited to the lower of foreign tax charged on the foreign income or the UK CT attributable to that income.

By utilising just £20,000 of the NTLR deficit against the dividend income, and carrying forward the balance, the company has ensured that the UK CT chargeable on the foreign divided income is £36,000, and that there is no restriction on the amount of DTR available.

If the company had chosen to utilise a greater amount of the NTLR deficit and carry forward a smaller deficit, the computation would have been as follows:

  • Dividend - £200,000
  • Part deficit cf - minus £100,000
  • Net non-trading Profits - £100,000
  • Trading profits - £50,000
  • Chargable profits - £150,000
  • CT@20% - £30,000
  • Double taxation tax credit relief - £20,000
  • CT payable - £10,000

The tax effect of this is that the amount of CT payable for the period would remain at £10,000. The amount of foreign tax credit relief would be limited to the UK CT on the foreign dividend income (i.e. £20,000), with the balance of £16,000 foreign tax credits “lost”. The NTLR deficit to carry forward would be £200,000 rather than £280,000. In effect, some £80,000 of NTLR deficit would be used in this computation to cover UK CT that could otherwise have been covered by DTR credits.

Example 2

In an accounting period beginning on 1 June 2018, a UK company has trading income of £100,000 and property income of £70,000.

It also has non-trading deficits of £300,000 carried down from the previous accounting period which began on 1 June 2017.

As the non-trading deficit arose in an accounting period beginning after 1 April 2017, when the conditions to carry it forward are satisfied, the non-trading deficit can be set against the company’s profits of any kind (excluding ring fenced profits).

  • Trading profit - £100,000
  • Property income - £70,000
  • Part deficit cf - minus £170,000
  • Net profits - nil

Assuming the conditions are still met, the £130,000 unutilised non-trading deficits are then carried forward again to the following period.