BKM305800 - Bank loss restriction: example of calculation of carried-forward reliefs available: rules applying for periods from 1 April 2017
BKM310200 - Bank loss restriction: example of calculation of carried-forward reliefs available: rules applying for periods from 1 April 2017
CTA10/S269ZF
The following is a general example that runs through the whole process from a calculation under CTA10/S269ZF to a tax calculation under CTA10/S4.
The example shows the application of the bank loss restriction as it applies for periods from 1 April 2017. The bank loss restriction calculation was changed with application from this date to align with the general loss restriction at CTA10/PART7ZA (BKM305000+, CTM05000+). The bank loss restriction affects relief for a company’s relevant carried-forward losses (BKM303150).
The example also shows the application of the general loss restriction, which equally applies from 1 April 2017 and restricts the relief that companies of all types, including banks, may be able to obtain for a broader range of carried-forward losses, regardless of when they were incurred.
Example: A Limited
In its period from 1 January to 31 December 2022, A Ltd, a banking company, has the following income and reliefs:
Carried-forward reliefs:
| Description | Amount |
|---|---|
| Pre 1 April 2015 BLR losses: Carried-forward trading losses accrued before 1 April 2015, carried forward under CTA10/S45 for relief against profits of the same trade | £500m |
| 1 April 2015 – 31 March 2017: Carried-forward trading losses accrued in periods from 1 April 2015 to 31 March 2017, carried forward under CTA10/S45 for relief against profits of the same trade | £70m |
| Post 1 April 2017: Carried-forward trading losses accrued from 1 April 2017, carried forward under CTA10/S45A for relief against total profits | £90m |
Results for the period:
| Description | Amount |
|---|---|
| Trading profits | £485m |
| UK property business profits | £120m |
| Group relief available from fellow group company | £20m |
The bank loss restriction will define the amount of the pre-2015 carried-forward trading losses that can be deducted from trading profits when A Ltd performs its tax calculation (see BKM305000).
The general loss restriction will define the total amount of restricted carried-forward losses that can be deducted from the company’s profits, including its pre-2015 carried-forward trading losses and all other restricted carried-forward losses (CTM05020).
Assume for the purposes of the example that:
- The carried-forward trading losses arose in the same trade as carried on in the accounting period ended 31 December 2022,
- The company has been assigned the full amount of the group’s £5m deductions allowance for the period, and
- The company allocates all of its deductions allowance and in-year reliefs to its trading profits.
After the above is taken into account, the company prioritises use of losses in the following order:
- Pre-1 April 2015 losses,
- Losses accrued in periods from 1 April 2015 to 31 March 2017, and
- Post-1 April 2017 losses.
In practice this banking company might instead prioritise the use of any losses that accrued after 1 January 2016 because these are available to reduce profits subject to the bank surcharge (see BKM403500).
1. Calculate modified total profits (CTA10/S269ZF(3) step 1)
This is the total profits of £485 million trading profits plus £120 million UK property business profits, before deduction of the in-year group relief or of restricted carried-forward losses.
This gives £605 million.
| Description | Amount |
|---|---|
| Trading profits | £485m |
| plus UK property business profits | £120m |
| Modified total profits | £605m |
2. Divide modified total profits into trading profits and non-trading profits (CTA10/S269ZF(3) step 3)
Trading profits are £485 million and non-trading profits are £120 million.
| Description | Amount |
|---|---|
| Trading profits | £485m |
| Non-trading profits | £120m |
3. Deduct in-year reliefs to find the qualifying trading, non-trading and total profits (CTA10/S269ZF/(3) steps 2, 4 and 5, S269ZFA(2))
The only in-year relief available is the £20 million group relief surrendered from a fellow group company.
A Ltd allocates the full £20 million of this relief to its trading profits, to give:
| Description | Amount |
|---|---|
| Trading profits | £485m |
| less group relief | (£20m) |
| Qualifying trading profits | £465m |
| Description | Amount |
|---|---|
| Non-trading profits | £120m |
| less in-year reliefs | (£0m) |
| Qualifying non-trading profits | £120m |
| Description | Amount |
|---|---|
| Modified total profits (from point 1, above) | £605m |
| less total amount of in-year reliefs | (£20m) |
| Qualifying total profits | £585m |
4. Subtract any deductions allowance and identify relevant trading profits, relevant non-trading profits and relevant profits (CTA10/S269ZF(1) to (2), CTA10/S269ZD(5), S269ZF(1) and (2))
The company has been allocated the whole amount of the group’s £5 million deductions allowance. It allocates this entirely to its trading profits. (The company’s trading profits deductions allowance is whatever part of its total deductions allowance it specifies as such in its return for the period, or, if the company does not specify an amount as its trading profits deductions allowance, is nil (CTA10/S269ZB(7), BKM305500).
This gives £5 million trading profits deductions allowance and nil non-trading profits deductions allowance.
Relevant profits are therefore as follows:
| Description | Amount |
|---|---|
| Qualifying trading profits | £465m |
| less trading profits deductions allowance | (£5m) |
| Relevant trading profits | £460m |
| Description | Amount |
|---|---|
| Qualifying non-trading profits | £120m |
| less non-trading profits deductions allowance | (£0m) |
| Relevant non-trading profits | £120m |
| Description | Amount |
|---|---|
| Qualifying total profits | £585m |
| less total deductions allowance | £5m |
| Relevant profits | £580m |
5. a) Calculate the relevant maximum – trading profits
i) Bank loss restriction
In accordance with the bank loss restriction, the company can use pre-1 April 2015 carried-forward trading losses against 25% of the amount of its relevant trading profits.
| Description | Amount |
|---|---|
| Relevant trading profits | £460m |
| Multiply by 25% | £115m |
The company relieves £115 million of its trading losses accrued before 1 April 2015, carried forward under CTA10/S45, against its trading profits. This is the maximum amount of relief the company can obtain for these losses in this period.
| Description | Amount |
|---|---|
| Carried-forward trading losses accrued before 1 April 2015, used in period to 31 December 2022 | £115m |
| Carried-forward trading losses accrued before 1 April 2015, carried forward to the next period under CTA10/S45 for relief against profits of the same trade: (£500m less £115m) | £385m |
ii) General loss restriction
Under the general loss restriction, the company must additionally calculate the relevant maximum for trading profits, which is the maximum amount of relief the company can obtain for trading losses carried forward against profits of the same trade. This is
| Description | Amount |
|---|---|
| Relevant trading profits | £460m |
| Multiply by 50% | £230m |
| plus trading profits deductions allowance | £5m |
| Relevant maximum – trading profits | £235m |
The relevant maximum for trading profits is £235m. However, the company has already relieved £115 million trading losses carried forward against profits of the same trade at point 5. a) i). The general loss restriction sets an overall limit, so this leaves a further £120 million profits that can potentially be relieved using carried-forward trading losses that accrued between 1 April 2015 and 31 March 2017.
| Description | Amount |
|---|---|
| Relevant maximum - trading profits | £235m |
| less carried-forward trading losses accrued before 1 April 2015, used in period to 31 December 2022 | (£115m) |
| Remaining capacity – that can be relieved using carried-forward trading losses accrued 1 April 2015 to 31 March 2017 | £120m |
The company has £70 million carried-forward trading losses accrued in periods from 1 April 2015 to 31 March 2017, carried forward under CTA10/S45 for relief against profits of the same trade. These losses are subject to the relevant maximum for trading profits but, because they accrued from 1 April 2015, they are not subject to the bank loss restriction.
Since £70 million is within the £120 million unused part of the relevant maximum for trading profits, the company is able to deduct the full amount of its £70 million carried-forward trading losses accrued in periods from 1 April 2015 to 31 March 2017 from its profits of the same trade. It does so.
| Description | Amount |
|---|---|
| Losses accrued 1 April 2015 to 31 March 2017 used in period to 31 December 2022 | £70m |
| Carried-forward trading losses accrued in periods from 1 April 2015 to 31 March 2017, carried forward under CTA10/S45 for relief against profits of the same trade | £0m |
In total, this means that the company deducts £185 million trading losses carried forward against profits of the same trade. This figure comprises £115 million pre-1 April 2015 trading losses, subject to both the bank loss restriction and the general loss restriction, and a further £70 million post-1 April 2015 pre 1-April 2017 trading losses subject to the general loss restriction only.
| Description | Amount |
|---|---|
| Carried-forward trading losses accrued before 1 April 2015 used in period to 31 December 2022 | £115m |
| plus carried-forward trading losses accrued 1 April 2015 to 31 March 2017 used in period to 31 December 2022 | £70m |
| Total deducted from trading profits | £185m |
5. b) Calculate the relevant maximum – non-trading profits
In this example, the company does not have any non-trading loan relationship deficits so in practice it does not need to calculate the two restrictions as they apply for non-trading profits. However, the calculations are included for completeness.
i) Bank loss restriction
In accordance with the bank loss restriction, the company can use pre-1 April 2015 carried-forward non-trading loan relationship deficits against 25% of the amount of its relevant non-trading profits.
| Description | Amount |
|---|---|
| Relevant non-trading profits (point 4) | £120m |
| Multiply by 25% | £30m |
ii) General loss restriction
In accordance with the general loss restriction, the relevant maximum for trading profits is:
| Description | Amount |
|---|---|
| Relevant non-trading profits | £120m |
| Multiply by 50% | £60m |
| plus non-trading profits deductions allowance | £0m |
| Relevant maximum – non-trading profits | £60m |
The general loss restriction sets an overall limit, so if the company had relieved any losses at point 5. b) i) above, it would need to deduct these to find the amount of profits that could potentially be relieved using post-1 April 2015 non-trading loan relationship deficits carried forward for relief against non-trading profits only.
5. c) Calculate the relevant maximum – total profits
i) Bank loss restriction
The company does not have any pre-1 April 2015 carried-forward management expenses. However, if it did have management expenses of this type, in accordance with the bank loss restriction, it would calculate the amount of pre-1 April 2015 carried-forward management expenses it can use as follows:
| Description | Amount |
|---|---|
| Relevant profits (point 4) | £580m |
| Multiply by 25% | £145m |
| less trading losses carried forward under CTA10/S45 against profits of the same trade used in period to 31 December 2022 (5a)(ii) | (£185m) |
| Trading losses carried forward under CTA10/S45B against profits of the same trade used in period to 31 December 2022 | £0m |
| NTLRDs carried forward under CTA09/S457 against non-trading profits used in period to 31 December 2022 | £0m |
| - | (£40m) |
As the result is a negative number the company would have no capacity to relieve pre-1 April 2015 carried-forward management expenses.
ii) General loss restriction
In accordance with the general loss restriction, the relevant maximum for total profits is the sum of
| Description | Amount |
|---|---|
| Relevant profits (point 4) | £580m |
| Multiply by 50% | £290m |
| plus total deductions allowance | £5m |
| Relevant maximum – total profits | £295m |
However, the company has already deducted a total of £185 million carried-forward losses at points 5. a) i) and ii) above. Since the relevant maximum for total profits is an overriding upper limit for the use of all carried-forward losses of types that are subject to the general loss restriction, the company needs to deduct these from its relevant maximum. This gives the company’s remaining capacity to use restricted carried-forward losses against its total profits.
If the company had deducted any losses at point 5. b), it would need to subtract these as well as losses deducted at 5. a) from its relevant maximum in order to find its remaining capacity to use restricted carried-forward losses against its total profits.
| Description | Amount |
|---|---|
| Relevant maximum - total profits | £295m |
| less pre 1 April 2017 and pre 1 April 2015 carried-forward trading losses deducted from trading profits (point 5.a)(ii), above) | (£185m) |
| Pre 1 April 2017 and pre 1 April 2015 NTLRDs carried forward under CTA09/S457 deducted from total profits in period to 31 December 2022 | £0m |
| Pre 1 April 2015 management expenses deducted from total profits in period to 31 December 2022 | £0m |
| Remaining capacity | £110m |
The company has £90 million trading losses accrued from 1 April 2017, carried forward under CTA10/S45A for relief against total profits.
Since £90 million is within the £110 million unused part of the relevant maximum, the company is able to deduct the full amount of its £90 million carried-forward trading losses accrued from 1 April 2017 from its total profits. It does so.
| Description | Amount |
|---|---|
| Carried-forward trading losses accrued from 1 April 2017, carried forward under CTA10/S45A for relief against total profits – used in period to 31 December 2022 | £90m |
| Carried-forward trading losses accrued before 1 April 2015, carried forward under CTA10/S45 for relief against profits of the same trade: (£90m less £90m) | £0m |
6. Calculate profits chargeable to Corporation Tax
The total profits chargeable to tax are:
| Desription | Amount |
|---|---|
| Trading profits | £485m |
| less trading losses carried-forward under CTA10/S45 for relief against profits of the same trade (point 5.a)(ii)) | (£185m) |
| - | £300m |
| plus UK property business profits | £120m |
| Total profits | £420m |
Taxable total profits are:
| Description | Amount |
|---|---|
| Total profits | £420m |
| less group relief | (£20m) |
| post-1 April 2017 trading losses carried forward under CTA10/S45A for relief against total profits (point 5.c)(ii)) | (£90m) |
| Taxable total profits | £310m |
Any subsequent changes to the tax calculation that affect relevant profits will entail a re-calculation of the amount allowed under the restriction (for example, if the company changes the amount of its claim to group relief). A claim to carry back relief from future periods would not be such a change (see BKM306350).
If the company should make a loss in the following year that is available for carry back it can then set it against the £310 million without any need for a recalculation of the amount of relief available for carried-forward losses (see BKM306300).
7. Calculate profits chargeable to banking surcharge
If the banking company is subject to the banking surcharge (see BKM400000 for more information on the banking surcharge), and used its losses as set out above, then the calculation of surcharge profits would be as follows. As we explain prior to point 1 in the calculation above, in practice a company might prioritise the use of losses arising after 1 January 2016 as these are available to reduce surcharge profits.
The company’s taxable total profits are £310m, as calculated in step 6. To this, the banking company needs to add:
- Non-banking group relief
- Non-banking or pre-2016 loss relief
- Relevant transferred out gains
and deduct:
- Non-banking transferred-in gains
- Research and Development expenditure credits.
Non-banking group relief
If we assume the group relief available from a fellow group company of £20m is from a non-banking company, then this will be added to the taxable total profits.
Non-banking or pre-2016 loss relief
£275m of loss relief has been claimed to arrive at the taxable total profits. £90m relates to post-1 April 2017 losses, so cannot be a pre-1 January 2016 loss and is not added back for the surcharge profits.
Of the remaining £185m, £115m relates to losses subject to the bank loss restriction, so arises pre-1 April 2015 and therefore before 1 January 2016, so is added back.
The remaining £70m relates to losses arising between 1 April 2015 and 31 March 2017. Any amount of this £70m loss that arose before 1 January 2016 should be added back for the purposes of the surcharge. For the purposes of this example, let us say that the whole of the £70m amount arose in the company’s twelve month accounting period ended 31 December 2016 and is therefore a post 1 January 2016 loss. The apportionment would strictly be performed for the company’s accounting period straddling the 1 January 2016 in line with the surcharge commencement provisions in F(No2)A15/Schedule3, Part 3 (see BKM409100).
Therefore the total pre-2016 loss relief is £115m.
There are no other additions or deductions for this example. Therefore the surcharge profits for this example would be:
| Description | Amount |
|---|---|
| Taxable total profits | £310m |
| Add | - |
| Non-banking group relief | £20m |
| Pre-2016 loss relief | £115m |
| Surcharge Profits | £445m |