Losses and deficits on non-trading loan relationships

Introduction
We have studied the computation of taxable total profits and the corporation
tax payable.
We now see how a company may obtain relief for trading losses and also for
deficits on non trading loan relationships. We look at the factors to take into
account when deciding which loss relief to choose.
In the next chapter, we will look at close companies and investment companies,
and then we will turn to groups and consortia.

Study guide

    Intellectual level
4 Corporation tax liabilities in situations involving further overseas and group aspects and in relation to special types of company, and the application of additional exemptions and reliefs  
(a) The contents of the Paper F6 study guide for corporation tax, under headings:  
E2 Taxable total profits 2
E6 The use of exemptions and reliefs in deferring and minimising corporation tax liabilities. 2
(c) Taxable total profits: 3
(iv) Determine the tax treatment of non trading deficits on loan relationships  
(vii)

 

Advise on the restriction on the use of losses on a change in ownership of a company  

Exam guide

You are likely to come across company losses at some point in the exam, although the question may include group relief. Always look to see if any requirements are specified in the question, such as to claim relief as early as possible, and then consider how to optimise the relief.

 

 

This chapter revises the treatment of trading losses which should be familiar from your F6 studies. The examination team has identified essential underpinning knowledge from the F6 syllabus which is particularly important that you revise as part of your P6 studies. In this chapter, the relevant topics are:

    Intellectual level
E2 Taxable total profits  
(d) Compute property business profits and understand how relief for a property business loss is given 2
(e) Understand how trading losses can be carried forward 2
(f) Understand how trading losses can be claimed against income of the current or previous accounting periods 2
(g) Recognise the factors that will influence the choice of loss relief claim 2

There are no technical changes for Financial Year 2015 in the material studied for F6 in Financial Year 2014. However, note that the single rate of corporation tax means that there are now only two factors when it comes to the choice of loss reliefs: timing and the extent to which qualifying charitable donations become unrelieved.

The relief for deficits on non-trading loan relationships and the restriction on the use of losses are new to you.

1 Reliefs for losses – overview

1.1 Trading losses

FAST FORWARD

Trading losses may be relieved by deduction from current total profits, total profits of earlier periods or future trading income.

In summary, the following reliefs are available for trading losses incurred by a company.

  • Claim to deduct from current profits
  • Claim to carry back and deduct from earlier profits
  • Make no claim and automatically carry forward to be deducted from future trading profits

These reliefs may be used in combination. The options open to the company are:

  • Do nothing, so that the loss is automatically carried forward and deducted from future trading profits
  • Claim to deduct from current profits, and carry any remaining unrelieved loss forward
  • Claim to deduct from current profits, then claim to carry any unused loss back and deduct from earlier profits, and then carry any remaining unrelieved loss forward.

The reliefs are explained in further detail below.

1.2 Non-trading deficits

Non-trading deficits on loan relationships can be relieved in similar ways to trading losses, but against different profits (see below).

1.3 Capital losses

Capital losses can only be deducted from capital gains in the same or future accounting periods, never from income (except losses suffered by an investment company on shares in a qualifying trading company). Capital losses must be deducted from the first available gains.

1.4 Overseas income losses

In the case of a trade which is controlled outside the UK, any loss made in an accounting period can only be deducted from trading income from the same trade in later accounting periods. The same rule applies to losses on overseas property businesses.

1.5 Miscellaneous income losses

Where in an accounting period a company makes a loss in a transaction where income would be taxable as miscellaneous income (such as one involving intangible fixed assets used for non trade purposes), the company can deduct the loss from any income on other transactions taxable as miscellaneous income in the same or later accounting periods. The loss must be deducted from the earliest such income available.

1.6 Property income losses

FAST FORWARD             Property business losses are deducted first from total profits of the current period and then carried forward to be deducted from future total profits.

Property business losses are first deducted from the company’s total profits of the current accounting period.

 

Any excess is then:

  • carried forward to the next accounting period and treated as a loss made by the company in that period, or
  • available for surrender as group relief (see later in this Text).
                               2 Trading losses                             6/10, 12/11, 6/12
2.1 Carry forward trade loss relief

FAST FORWARD

Trading losses carried forward can only be deducted from future trading profits of the same trade.

If a company makes no claim for relief for its trading losses they will be automatically carried forward and deducted from income of the same trade in future accounting periods. Relief is by deduction from the first available trading profits.

 

 

A Ltd has the following results for the three years to 31 March 2016.

                                                                   Year ended

                                                               31.3.14                                                       31.3.15                                                        31.3.16

£                                                                                       £                                                                   £

Trading profit/(loss)                                                                                      (8,550)                                           3,000                                                                                                    6,000

Property income                                                                                                     0                                         1,000                                                                                                          1,000

Qualifying charitable donation                                                                          300                                                   1,400                                                                                             1,700

Calculate the taxable total profits for all three years showing any losses available to carry forward at 1 April 2016.

 

 

                                                                   Year ended

31.3.14                         31.3.15                                                                                                                 31.3.16

£                               £                                                                                                                            £

Trading income                                                                                                      0              3,000                              6,000

Less carry forward trade loss relief                                                                                       (3,000)                                         (5,550)

0                               0                                                                                                                            450

Property income                                                                                                    0              1,000                              1,000

Total profits

Less qualifying charitable donation      0  (1,000)  (1,450) Taxable total profits          0          0          0

Unrelieved qualifying charitable donation                                                       300                 400                                                         250

Note that the trading loss carried forward is deducted from the trading profit in future years. It cannot be deducted from the property income.

The qualifying charitable donations that become unrelieved are wasted as they cannot be carried forward.

Loss memorandum

£

Loss for y/e 31.3.14                                                                                                    8,550

Less used y/e 31.3.15                                                                                              (3,000)

Loss carried forward at 1.4.15                                                                                   5,550

Less used 31.3.16                                                                                                    (5,550)

Loss carried forward at 1.4.16                                                                                           0

 

2.2 Trade loss relief by deduction from total profits

FAST FORWARD

Loss relief against total profits may be given by deduction from current period profits and by deduction from profits of the previous 12 months. A claim for current period loss relief can be made without a claim for carry back. However, if a loss is to be carried back a claim for current period relief must have been made first.

2.2.1 Current year claim

A company may claim to deduct a trading loss (arising in a UK trade) incurred in an accounting period from total profits of the same accounting period before deducting qualifying charitable donations.

Any loss remaining unrelieved is automatically carried forward to be deducted from future profits of the same trade unless a carry back claim is made.

2.2.2 Carry back claim

Such a loss may then be carried back and deducted from total profits before deducting qualifying charitable donations of an accounting period falling wholly or partly within the 12 months of the start of the period in which the loss was incurred.

Any possible loss relief claim for the period of the loss must be made before any excess loss can be carried back to a previous period.

Any carry back is to more recent periods before earlier periods. Relief for earlier losses is given before relief for later losses.

Any loss remaining unrelieved after any loss relief claims against total profits is carried forward to be deducted from future profits of the same trade.

2.2.3 The claim

A claim for relief against current or prior period profits must be made within two years of the end of the accounting period in which the loss arose.

Any claim must be for the whole loss (to the extent that profits are available to relieve it). The loss can however be reduced by not claiming full capital allowances, so that higher capital allowances are given (on higher tax written down values) in future years.

 

 

 

Helix Ltd has the following results.

   
  Y/e 30.11.14 y/e

30.11.15

    £
Trading profit/(loss) 22,500 (19,500)
Bank interest 500 500
Chargeable gains 0 4,000
Qualifying charitable donation 250 250

Show the taxable total profits for both years affected assuming that loss relief by deduction from total profits is claimed.

 

  y/e

30.11.14

y/e 

30.11.15

  £ £
Trading profit 22,500 0
Investment income  500  500
Chargeable gains             0      4,000
Total profits   23,000  4,500
Less current period loss relief             0     (4,500)
   23,000   0
Less carry back loss relief  (15,000)              (0)
    8,000      0
Less qualifying charitable donation       (250)               0
Taxable total profits     7,750               0

The loss of the year to 30 November 2015 is relieved by deduction from current year total profits and from total profits of the previous 12 months.

       
Unrelieved qualifying charitable donation            250
       
Loss memorandum      
Loss incurred in y/e 30.11.15     19,500
Less used:            y/e 30.11.15       (4,500)
                             y/e 30.11.14      (15,000)
Loss available to carry forward                0

 

2.2.4 Periods of account which are not 12 months in length

If a period falls partly outside the 12 months, loss relief is limited to the proportion of the period’s profits (before qualifying charitable donations) equal to the proportion of the period which falls within the 12 months. 

 

 

 

Tallis Ltd had the following results for the three accounting periods to 31 December 2015.

 
                                                                                                                          Y/e              3 months to Y/e
                                                                                                                       30.9.14             31.12.14 31.12.15
                                                                                                                            £                         £ £
              Trading profit (loss)                                                                         20,000               12,000 (39,000)
              Building society interest                                                                    1,000                    400 1,800
             Qualifying charitable donations                                                           600                    500 0

Show the taxable total profits for all years. Assume loss relief is claimed by deduction from total profits where possible.

       
Unrelieved qualifying charitable donations            0        500          0
       
Loss memorandum   £  
Loss incurred in y/e 31.12.15   39,000  
Less used y/e 31.12.15   (1,800)  
Less used p/e 31.12.14   (12,400)  
Less used y/e 30.9.14 £21,000 × 9/12 (max)     (15,750)  
C/f       9,050  
   Y/e  3 months to  Y/e
   30.9.14  31.12.14 31.12.15
   £  £  £
Trading profit  20,000  12,000 0
Interest income    1,000       400   1,800
Total profits  21,000  12,400  1,800
Less current period loss relief                            (1,800)
   21,000  12,400  0
Less carry back loss relief  (15,750)  (12,400)           
   5,250  0  0
Less qualifying charitable donations       (600)            0
Taxable total profits    4,650            0          0

Notes

  • The loss can be carried back to be deducted from profits of the previous 12 months. This means profits in the y/e 30.9.14 must be time apportioned by multiplying by 9/12.
  • Losses remaining after the loss relief claims by deduction from total profits are carried forward to be deducted from future trading profits.

 

2.2.5 Terminal loss relief

FAST FORWARD

Trading losses in the last 12 months of trading can be carried back and deducted from profits of the previous 36 months.

For trading losses incurred in the twelve months up to the cessation of trade the carry back period is extended from twelve months to three years, later years first. 

 

 

Brazil Ltd had the following results for the accounting periods up to the cessation of trade on 30 September 2015.

Y/e                       Y/e                       Y/e                               Y/e

30.9.12                30.9.13             30.9.14                           30.9.15

£                         £                           £                                      £

Trading profits                                                  60,000               40,000                15,000                                     (180,000)

Gains                                                                           0               10,000                          0                                 6,000

Property income                                               12,000               12,000                12,000                                         12,000

You are required to show how the losses are relieved assuming the maximum use is made of loss relief by deduction from total profits.

   Y/e  Y/e  Y/e  Y/e
   30.9.12  30.9.13  30.9.14  30.9.15
   £  £  £  £
Trading profits  60,000  40,000  15,000  0
Property income  12,000  12,000  12,000  12,000

Gains            0              0     6,000 Total profits  72,000    27,000  18,000

Less current period loss relief        (18,000)
Less carry back loss relief  (72,000)  (62,000)  (27,000)  
Taxable total profits           0            0            0            0
Loss memorandum        
         £
Loss in y/e 30.9.15        180,000

Less used y/e 30.9.15                                                                                                                                                                                                     )

Loss of y/e 30.9.15 available for 36 months carry back

Less used y/e 30.9.14                                                                                                                                                                              )

         
Less used y/e 30.9.13        (62,000)
         73,000
Less used y/e 30.9.12        (72,000)
Loss remaining unrelieved           1,000

 

 

3 Reliefs for deficits on non-trading loan relationships

                                                                                                 12/12, 6/15

FAST FORWARD

Deficits on non-trading loan relationships can be used in a similar way to trading losses.

A deficit on a non-trading loan relationship may be deducted, in whole or part, from any profit of the same accounting period. Relief is given after relief for any trading loss brought forward but before relief is given for a trading loss of the same or future period.

 

 

Witherspoon Ltd has the following results for the two years ended 31 December 2015:

                                                                     2014                                                                                            2015

£                                                                                               £

Trading profit/(loss)                                                                                               70,000                                           (42,000)

Trading losses brought forward    (20,000)                – Bank interest receivable             2,000

Interest payable on a loan for non-trading purposes                                        (11,000)

Show how relief may be given for the deficit on the non-trading loan relationship in the year ended 31 December 2014.

Y/e 31.12.14                                                                                                                      £

Trading income                                                                                                       70,000

Losses brought forward                                                                                      (20,000)

50,000

Less non-trading deficit £(11,000 – 2,000)                                                          (9,000)

41,000

Losses carried back           (41,000) Total taxable profits                   Nil

Loss memorandum                                                                                                                                                                                                                                                    £

Incurred in y/e 31.12.15    42,000  Less used: y/e 31.12.14    (41,000)  Available to carry forward       1,000

 

A deficit is eligible for group relief (see later in this Text).

A deficit may be deducted from non-trading income arising from loan relationships in the previous twelve months. In this case, relief is given after any trading loss of the same or future period. A claim must be made within two years of the deficit period.

Any deficits unrelieved after claiming the above reliefs are automatically carried forward and deducted from non-trading profits of the company for succeeding accounting periods.  

A company can choose how much deficit to relieve in the current period, how much to carry back and how much to carry forward; unlike trading loss relief, these are not all or nothing claims, and the company can choose to carry back a deficit even if it does not claim current period relief.

Exam focus         Deficits on non-trading loan relationships were tested in December 2012 Question 5 Candle Ltd where the point          set off was against total profits of the current period. The examiner commented that ‘The loan relationships issue was not done well. The vast majority of candidates failed to apply the basic rules such that they did not offset the amounts in order to arrive at a deficit on non-trading loan relationships.’

4 Restrictions on loss relief 12/10, 12/14
If there is a change in ownership of a company, the carry forward of losses is restricted if there is also a major change in the nature of the trade within three years of the change in ownership.

FAST FORWARD

4.1 The continuity of trades

Carry forward loss relief is only available against future profits arising from the same trade as that in which the loss arose.

The continuity of trade for this purpose was considered in a case involving a company trading as brewers: Gordon & Blair Ltd v CIR 1962. It ceased brewing but continued to bottle and sell beer. The company claimed that it carried on the same trade throughout so that its losses from brewing could be set off against profits from the bottling trade. The company lost their case and were prevented from obtaining any further relief for losses in the brewing trade.

 

4.2 The disallowance of loss relief following a change in ownership

Trading losses may be restricted where there is a change in ownership of a company and there is either:

  • A major change in the nature or conduct of the trade within three years before or three years after the change in ownership, or
  • After the change in ownership there is a considerable revival of the company’s trading activities which at the time of the change had become small or negligible.

If the restriction applies:

  • Any losses incurred before the change in ownership cannot be carried forward against post acquisition profits.
  • Any losses incurred after the change in ownership cannot be carried back against profits arising before the date of the change of ownership.

For example, if a company changes its ownership on 1 July 2015 and there is a major change in the nature or conduct of its trade between 1 July 2012 and 30 June 2018 the carry back and carry forward of losses is restricted.

Examples of a major change in the nature or conduct of a trade include changes in:

  • The type of property dealt in (for example a company operating a dealership in saloon cars switching to a dealership in tractors)
  • The services or facilities provided (for example a company operating a public house changing to operating a discotheque)
  • Customers
  • Outlets or markets

However, changes to keep up to date with technology or to rationalise existing ranges of products are unlikely to be regarded as major. HMRC consider both qualitative and quantitative issues in deciding if a change is major.

If the change in ownership occurs in (rather than at the end of) an accounting period, the period is divided into two, one up to and one after the change, for the purposes of this rule, with profits and losses being time-apportioned.

A change in ownership is disregarded for this purpose if both immediately before and immediately after the change the company is an effective 75% subsidiary of the same company.

4.3 Uncommercial trades

A loss made in a trade which is not conducted on a commercial basis and with a reasonable expectation of gain cannot be set off against the company’s profits in the same or previous accounting periods. Such losses are only available to carry forward against future profits of the same trade.

4.4 Farming and market gardening

A company carrying on the trade of farming or market gardening is treated in the same way as one that trades on an uncommercial basis in any accounting period if, in the five successive years immediately before that accounting period, the trade made a loss (before capital allowances).

5 Choosing loss reliefs and other planning points

When selecting a loss relief, consider the timing of the relief and whether relief for qualifying charitable donations may be lost.

FAST FORWARD

 

One of the competencies you require to fulfil Performance Objective 17 Tax planning and advice of the PER is to mitigate and/or defer tax liabilities through the use of standard reliefs, exemptions and incentives. You can apply the knowledge you obtain from this section of the text to help to demonstrate this competence.
5.1 Alternative loss reliefs

Several alternative loss reliefs may be available. In making a choice consider:

  • How quickly relief will be obtained: loss relief against total profits is quicker than carry forward loss relief.
  • The extent to which relief for qualifying charitable donations might be lost.

 

 

 

M Ltd has had the following results.

         
      Year ended 31 March    
      2013                   2014 2015 2016
           £                          £ £ £
Trading profit/(loss)     2,000               (500,000) 200,000 138,000
Chargeable gains     35,000               250,000 0 0
Qualifying charitable donations paid     30,000                 20,000 20,000 20,000

Recommend appropriate loss relief claims, and compute the corporation tax for all years based on your recommendations. Assume that future years’ profits will be similar to those of the year ended 31 March 2016 and that the rate of corporation tax is 20% throughout.

 

 

A loss relief against total profits claim for the year ended 31 March 2014 will relieve £750,000 of the loss but waste the qualifying charitable donation of £20,000.

Taxable total profits in the previous year are £7,000 (£35,000 + £2,000 – £30,000). Carry back would waste qualifying charitable donations of £30,000 and would use £37,000 of loss to save tax on £7,000.

If no current period loss relief claim is made the loss will be carried forward and £200,000 of the loss will be relieved in the year ended 31 March 2015, with £20,000 of qualifying charitable donations being wasted. The remaining £300,000 of the loss, would be carried forward to the year ended 31 March 2016 and later years.

To conclude, a loss relief claim by deduction from total income should be made for the year of the loss but not in the previous year. £20,000 of qualifying charitable donations would be wasted in the current year, but relief for £250,000 of the loss would be obtained quickly.

The final computations are as follows.        
       Year ended 31 March  
            2013                2014               2015  2016
              £                      £                       £  £
Trading income          2,000                       0          200,000  138,000
Less carry forward loss relief                 0                        0         (200,000)  (50,000)
           2,000                       0                      0  88,000

Chargeable gains                                                         35,000                                              0                                                   0

Less current period loss relief              0  (250,000)              0            0
     37,000  0  0  88,000
Less qualifying charitable donations    (30,000)              0              0  (20,000)
Taxable total profits      7,000              0              0  68,000

Total profits                                                                 37,000                                                0                                 88,000

           
         Year ended 31 March  
              2013                2014               2015  2016
                £                      £                      £  £
CT at 20%          1,400                         0                      0  13,600

 

 

5.2 Loss relief and capital allowances

A company must normally claim capital allowances on its tax return. A company with losses could consider claiming less than the maximum amount of capital allowances available. This will result in a higher tax written down value to carry forward and therefore higher capital allowances in future years.

Reducing capital allowances in the current period reduces the loss available for relief against total profits. As this relief, if claimed, must be claimed for all of a loss available, a reduced capital allowance claim could be advantageous where qualifying charitable donations may be wasted in the current (or previous) period if the maximum claim is made. Also a large loss cannot be used in the current (or previous) accounting period if there is no other income or gains, but would have to be carried forward. In that case, it may be advantageous to make a reduced capital allowance claim so that any loss in future years is greater. An increased loss in a future accounting period can be used against other income and gains in that period (compared with a brought forward loss that can only be used against trading income of the same trade) or can be group relieved (see later in this Text).

Trading losses may be relieved by deduction from current total profits, total profits of earlier periods or future trading income.
Property business losses are deducted first from total profits of the current period and then carried forward to be deducted from future total profits.
Trading losses carried forward can only be deducted from future profits of the same trade.
Loss relief against total profits may be given by deduction from current period profits and from profits of the previous 12 months. A claim for current period loss relief can be made without a claim for carry back.

However, if a loss is to be carried back a claim for current period relief must have been made first.

Trading losses in the last 12 months of trading can be carried back and deducted from profits of the previous 36 months.
Deficits on non-trading loan relationships can be used in a similar way to trading losses.
If there is a change in ownership of a company, the carry forward of losses is restricted if there is also a major change in the nature of the trade within three years of the change in ownership.
When selecting a loss relief, consider the timing of the relief and whether relief for qualifying charitable donations may be lost.

Chapter roundup

Quick quiz

  • From what profits may trading losses carried forward be deducted?
  • To what extent may losses in a continuing trade be carried back?
  • What relief is available in the current accounting period for a non-trading deficit?
  • Why might a company make a reduced capital allowances claim?

Answers to quick quiz

  • Profits from the same trade.
  • A loss may be carried back and deducted from total profits (before deducting qualifying charitable donations) of the prior 12 months. The loss carried back is the trading loss left unrelieved after a claim against total profits (before deducting qualifying charitable donations) of the loss making accounting period has been made.
  • A deficit on a non-trading loan relationship may be deducted from profits of the same accounting period. Relief is given after relief for any trading loss brought forward but before relief is given for a current or future trading loss.

The deficit is also eligible for group relief.

  • Reducing capital allowances reduces the size of the available loss and so may preserve relief for qualifying charitable donations. It may also generate a larger trading loss in future accounting periods which can be set against other income and gains (rather than a carried forward loss which can only be set against trading profits of the same trade) or group relieved.

 

 

Number Level Marks Time
Q27 Introductory 15 29 mins

 

 

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