Losses: example: losses applied to a new theatrical production
Part 15C Corporation Tax Act 2009 (CTA 2009)
A newly incorporated Theatrical Production Company (TPC) produces theatrical production 1 which qualifies for Theatre Tax Relief (TTR). The separate theatrical trade for theatrical production 1 commences on 3 July 2015, the production closes on 10 July 2016 and the trade ceases on 15 August 2016 when the TPC sells the rights to production 1 outright.
On 17 March 2016 the TPC commences a new separate theatrical trade in respect of theatrical production 2 which also qualifies for TTR and this trade is ongoing as at 15 August 2016.
In the year to 31 December 2016 another company, in the same group as the TPC, has trading profits of £200,000.
The company draws up accounts to 31 December. The accounting periods are therefore:
- 3 July 2015 to 31 December 2015
- year to 31 December 2016
- year to 31 December 2017.
The computations show:
|Period ended 31 December 2015||Production 1||Production 2||Other|
|Income from the production||100,000|
|Costs of the production||(850,000)|
|Theatre Tax Relief – additional deduction||(400,000)|
|Profit/(loss) on production||(1,150,000)|
|Other income – non-trade loan relationship||10,000|
The computation shows a trading loss of £1,150,000 on Production 1. The TPC chooses not to surrender any part of this trading loss for the Theatre Tax Credit (TTC). In reality, a TPC would be unlikely to make this choice, which is intended to illustrate the computational principle.
As this is a pre-completion period, the loss is restricted and cannot be offset against other income. The £10,000 interest income (the non-trade loan relationship income) is therefore taxable.
|Year to 31 December 2016||Production 1||Production 2||Other|
|Income from the production||500,000||800,000|
|Costs of the production||(150,000)||(400,000)|
|Theatre Tax Relief – additional deduction||(100,000)||(300,000)|
|Profit/(loss) on production||250,000||100,000|
|Other income – non-trade loan relationship||20,000|
The computation shows a profit of £250,000 on Production 1 and a profit of £100,000 on Production 2. This is the period in which the separate theatrical trade for Production 1 ceased and is therefore the completion period for Production 1.
The brought forward loss of £1,150,000 reduces the profit of Production 1 to nil. This leaves an unutilised loss of £900,000 (£1,150,000 - £250,000) of which:
- £150,000 (£400,000 - £250,000) is attributable to TTR, and
- £750,000 is not attributable to TTR.
As this is a completion period, the company can utilise the losses not attributable to TTR against other profits and carry them back to the previous period. The company therefore utilise losses as follows:
|Set against other profits of the same accounting period||£120,000||(£100,000||+ £20,000)|
|Carried back against profits of the previous period||£10,000|
|Surrendered as group relief||£200,000|
This is the maximum amount that can be relieved. It leaves nil total taxable profits in both periods.
This leaves unutilised losses as follows:
- £150,000 is attributable to TTR, and
- £420,000 (£750,000 - £330,000) is not attributable to TTR.
By claiming terminal loss relief under the TTR rules, the losses are transferred to the separate theatrical trade for Production 2. This trade will therefore treat the full £570,000 losses (£150,000 + £420,000) as brought forward losses in the next accounting period.
|Year ended 31 December 2017||Production 1||Production 2||Other|
|Income from the production||Ceased||1,000,000|
|Costs of the production||(400,000)|
|Theatre Tax Relief – additional deduction||(200,000)|
|Profit/(loss) on production||400,000|
|Other income – non-trade loan relationship||50,000|
The computation for this period shows a trading profit of £400,000 for Production 2. The losses deemed to be brought forward of £570,000 are utilised against this profit first.
The profit is reduced to nil and there are £170,000 of losses deemed to be brought forward for Production 2 at the beginning of the next period.
These losses can only be used against the profits of the trade of Production 2. This is because the legislation states that, in a pre-completion period, the losses must be treated as trading losses carried forward under S45 Corporation Tax Act 2010.
The £50,000 interest income (the non-trade loan relationship income) is therefore taxable.
The following table shows how the losses from Production 1 are used in the various accounting periods:
|Production 1||Production 2|
|Period ended 31 December 2015|
|Production period loss||400,000||750,000|
|Losses carried forward into completion period||400,000||750,000|
|Year ended 31 December 2016|
|Losses brought forward||400,000||750,000|
|Utilised against Production 1 profit||(250,000)|
|Set off against other profits of the same accounting period||(120,000)|
|Carried back against NTLR of previous period||(10,000)|
|Surrendered as group relief||(200,000)|
|Losses carried forward under terminal loss relief rules||150,000||420,000|
|Year ended 31 December 2017|
|Losses brought forward||570,000|
|Utilised against Production 2 profit||(400,000)|
|Losses carried forward||170,000|