APC30080 - Losses: example - terminal losses surrendered
Part 15A Chapter 2 Corporation Tax Act 2009 (CTA 2009)
Company A is a Television Production Company (TPC) and produces Animation 1 which qualifies for Television Tax Relief (TTR). The company draws up accounts to 31 December.
The separate trade for the purposes of Part 15A CTA 2009 commences on 3 July 2013 and the programme is completed on 10 February 2014. The company ceases its animation trade in respect of Animation 1 on 15 August 2014 when it sells the rights to Animation 1 outright.
Company A is in a group as defined for group relief purposes with Company B. Company B is also a TPC and carries on an animation trade in respect of Animation 2. It commences Animation 2, which also qualifies for TTR, on 17 March 2014.
The accounting periods are therefore:
| Company A | Company B |
|---|---|
| 3 July to 31 December 2013 | 17 March to December 2014 |
| Period ended 15 August 2014 | Year ended 31 December 2014 |
The computations show:
| Company A - period ended 31 December 2013 | Animation 1 - £ |
|---|---|
| Income from the programme | 100,000 |
| Costs of the animation | (850,000) |
| Television tax relief - additional deduction | (400,000) |
| Profit/(loss) on programme | (1,150,000) |
| Other income - non-trade loan relationship | 10,000 |
The computation shows a trading loss of £1,150,000 on Animation 1. Company A chooses not to surrender any part of this trading loss for the Television 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 production 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 August 2014 | Animation 1 - £ |
|---|---|
| Income from the programme | 500,000 |
| Costs of the animation | (150,000) |
| Television tax relief - additional deduction | (100,000) |
| Profit/(loss) on programme | 250,000 |
| Other income - non-trade loan relationship | 20,000 |
| Company B - period ended 31 December 2014 | Animation 2 - £ |
|---|---|
| Income from the programme | 800,000 |
| Costs of the animation | (400,000) |
| Television tax relief - additional deduction | (300,000) |
| Profit/(loss) on programme | 100,000 |
| Other income - non-trade loan relationship | 20,000 |
Company A’s computation shows a profit of £250,000 on Animation 1 and Company B’s computations shows a profit of £100,000 on Animation 2.
This is the completion period in respect of Animation 1. It is also the cessation period of the trade.
The brought forward loss of £1,150,000 reduces the profit of Animation 1 to nil. This leaves an unutilised loss of £900,000 of which:
- £150,000 is attributable to TTR, and
- £750,000 is not attributable to TTR
As this is a completion period, the company can utilise the profits not attributable to TTR against other profits and carry them back to the previous period. They therefore utilise losses as follows:
| - | Amount of loss |
|---|---|
| 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 |
| Total | £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. Without the capacity to claim terminal loss relief, these losses may be stranded.
By claiming terminal loss relief under the TTR rules, the losses are transferred to Company B. The losses must be allocated to the trade of Animation 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 2015 | Animation 2 - £ |
|---|---|
| Income from the programme | 1,000,000 |
| Costs of the animation | (400,000) |
| Television tax relief - additional deduction | (200,000) |
| Profit/(loss) on programme | 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 Animation 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 Animation 2 at the beginning of the next period.
In these circumstances, the losses can only be used against the profits of the trade of Animation 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 following table shows how the losses from Animation 1 are used in the various accounting periods:
| - | TTR - Company A - £ | non-TTR - Company A - £ | non-TTR - Company B - £ |
|---|---|---|---|
| APE 31/12/2013 | - | - | - |
| Production period loss | 400,000 | 750,000 | - |
| Losses carried forward into completion period | 400,000 | 750,000 | - |
| APE 31/12/2014 | - | - | - |
| Losses brought forward | 400,000 | 750,000 | - |
| Set off against Animation 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 31/12/2015 | - | - | - |
| Losses brought forward | - | - | 750,000 |
| Utilised against profits of Animation 2 | - | - | (400,000) |
| Losses carried forward | - | - | 350,000 |