BKM305500 - Bank loss restriction: Calculation of carried-forward reliefs available: calculation of relevant profit APs from 1/4/17 – deductions allowance

CTA10/S269ZB(7), S269ZC(5), S269ZF(1) and (2)

The general loss restriction at CTA10/PART7ZA includes a deductions allowance of up to £5m per twelve month period, shared between a group (CTA10/S269ZR to 269ZZB). The company can allocate its deductions allowance between trading and non-trading profits as it chooses. The deductions allowance is specific to an accounting period and cannot be carried forward or back to other periods.

The allowance increases the amount of losses a company may be able to relieve in accordance with the general loss restriction, but does not increase the amount of losses a company may be able to relieve in accordance with the bank loss restriction.

In fact, if the company specifies a deductions allowance in its return (CTA10/S269ZZ), this may in practice reduce the amount of relief it can get for losses subject to the bank loss restriction. This is because the bank loss restriction is calculated, broadly, by multiplying relevant profits by 25% (see BKM303200). Once it has deducted in-year amounts to find its qualifying trading profits and qualifying non-trading profits (BKM305400), the company calculates its relevant profits as follows:

  • Allocate the deductions allowance between trading and non-trading profits, to give the trading profits deductions allowance and the non-trading profits deductions allowance (CTA10/S269ZB(7) and S269ZC(5)),
  • Subtract the trading profits deductions allowance from qualifying trading profits: this gives the relevant trading profits,
  • Subtract the non-trading profits deductions allowance from qualifying non-trading profits: this gives the relevant non-trading profits,
  • Add together the relevant trading and non-trading profits to find the relevant profits.

The bank loss restriction specifies that, for example, any deduction for the accounting period in respect of pre-2015 carried-forward trading losses may not exceed 25% of the relevant trading profits (CTA10/S269CA). This means that the lower the relevant trading profits, the less relief the banking company will be able to obtain for its pre-2015 carried-forward trading losses.

The general loss restriction allows companies to add back the deductions allowance at a later stage in the calculation, increasing their overall relief. However, the bank loss restriction does not allow this.

For example, in its accounting period ending 31 December 2020, a banking company only has trading profits, and is not in a group so is entitled to a full £5m deductions allowance. Its qualifying trading profits are £35m. For the bank loss restriction, the company

  • Subtracts £5m deductions allowance to give relevant trading profits of £30m, and
  • Multiplies £30m by 25%, giving £7.5m.

£7.5m is the maximum amount of relief the company can claim for pre-2015 trading losses. If there is any balance of the £7.5m remaining after deducting pre-2015 trading losses, the company may be able to get relief for any pre-2015 management expenses, however, this depends on what other reliefs the company has utilised in the period (see BKM303200).

If the company has carried-forward losses that are not subject to the bank loss restriction, for example, trading losses incurred from 1 April 2015, it will need to calculate the general loss restriction as well. Broadly, this involves multiplying relevant profits by 50% and adding back the deductions allowance to give relevant maxima for relief.

Guidance on the general loss restriction, including the deductions allowance, has been published in draft.