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HMRC internal manual

Video Games Development Company Manual

Losses: taxation - losses - example - terminal losses surrendered

Part 15B Chapter 2 Corporation Tax Act 2009 (CTA 2009)

Company A is a Video Games Development Company (VGDC) and develops Video Game 1 which qualifies for Video Games Tax Relief (VGTR). The company draws up accounts to 31 December.

The separate trade for the purposes of Part 15B CTA 2009 commences on 3 October 2014 and the video game is completed on 10 February 2015. The company ceases its video game trade in respect of Video Game 1 on 15 October 2015 when it sells the rights to Video Game 1 outright.

Company A is in a group as defined for group relief purposes with Company B. Company B is also a VGDC and carries on a video game trade in respect of Video Game 2. It commences Video Game 2, which also qualifies for VGTR, on 17 March 2015.

The accounting periods to be considered are:

Company A Company B
3 October to 31 December 2014 17 March to 31 December 2015
Period ended 15 October 2015 Year ended 31 December 2016

The computations show:

Company A
Period ended 31 December 2014 Video Game 1
£    
  Income from the video game 100,000
  Costs of the video game (850,000)
  Video Game Tax Relief - additional deduction (400,000)
  Profit/(loss) on video game (1,150,000)
  Other income - non-trade loan relationship 10,000

The computation shows a trading loss of £1,150,000 on Video Game 1. Company A chooses not to surrender any part of this trading loss for the Video Game Tax Credit (VGTC).

As this is a development accounting period, the loss is restricted and cannot be offset against other income. The interest income (the non-trade loan relationship income) is therefore taxable.

Company A
Period ended 15 October 2015 Video Game 1
£    
  Income from the video game 500,000
  Costs of the video game (150,000)
  Video Game Tax Relief - additional deduction (100,000)
  Profit/(loss) on video game 250,000
  Other income - non-trade loan relationship 20,000

 

Company B
Period ended 31 December 2015 Video Game 2
£    
  Income from the video game 800,000
  Costs of the video game (400,000)
  Video Game Tax Relief - additional deduction (300,000)
  Profit/(loss) on video game 100,000
  Other income - non-trade loan relationship 20,000

Company A’s computation shows a profit of £250,000 on Video Game 1 and Company B’s computations shows a profit of £100,000 on Video Game 2.

This is the completion period in respect of Video Game 1. It is also the cessation period of the trade.

The brought forward loss of £1,150,000 reduces the profit of Video Game 1 to nil. This leaves an unutilised loss of £900,000 of which:

  • £150,000 is attributable to VGTR, and
  • £750,000 is not attributable to VGTR.

As this is a completion period, the company can utilise the profits not attributable to VGTR against other profits and carry them back to the previous period. They therefore utilise losses as follows:

Set against other profits of the same accounting period £20,000
   
Carried back against profits of the previous period £10,000
Surrendered as group relief £120,000
  £150,000

This is the maximum amount that can be relieved. It leaves Company A with nil total taxable profits in both periods. Company B is the recipient of the group relief and this reduces its total taxable profits to nil also.

This leaves Company A with unutilised losses of £750,000. These losses would be stranded without the capacity to claim terminal loss relief.

By claiming terminal loss relief under the VGTR rules, the losses are transferred to Company B. The losses must be allocated to the trade of Video Game 2. This trade will therefore treat the full £750,000 losses as brought forward losses in the next accounting period.

Company B
Period ended 31 December 2016 Video Game 2
£    
  Income from the video game 1,000,000
  Costs of the video game (400,000)
  Video Game Tax Relief - additional deduction (200,000)
  Profit/(loss) on video game 400,000
  Other income - non-trade loan relationship 50,000

Company B’s computation for this period shows a trading profit of £400,000 for Video Game 2. The losses deemed to be brought forward of £750,000 are utilised against this profit first.

Company B’s profit is reduced to nil and there are £350,000 of losses deemed to be brought forward for Video Game 2 at the beginning of the next period.

These losses can only be used against the profits of the trade of Video Game 2. This is because the legislation states that the losses must be treated as trading losses carried forward under S45 Corporation Tax Act 2010.

The following table shows how the losses from Video Game 1 are used in the various accounting periods:

  Company A

VGTR

£ Company A

non-VGTR

£ Company B

non-VGTR

£        
  APE 31/12/14      
  Development period loss 400,000 750,000  
  Losses carried forward into completion period 400,000 750,000  
  APE 31/12/15      
  Losses brought forward 400,000 750,000  
  Set off against Video Game 1 profit (250,000)    
  Set off against NTLR   (20,000)  
  Carried back against NTLR of previous period   (10,000)  
  Surrendered as group relief   (120,000)  
  Losses surrendered under terminal loss relief rules 400,000 750,000  
  APE 31/12/16      
  Losses brought forward     750,000
  Utilised against profits of Video Game 2     (400,000)
  Losses carried forward     350,000

Alternatively Company A could surrender the loss eligible for VGTR for a tax credit - (see VGDC30100).