BKM306700 - Bank loss restriction: carried forward reliefs outside the restriction: allowance for building societies: overview

CTA10/S269CH, FA98/Schedule 18/Part 9D

Building societies, within the meaning of the Building Societies Act 1986 (see CFM14080) or a bank established under the Savings Bank (Scotland) Act 1819 receive a £25,000,000 allowance. The £25,000,000 is a one-off amount (rather than an annual one), which can be used over multiple accounting periods.

This has application only for the bank loss restriction. The allowance cannot be used to increase the amount of relief available to a company under the general loss restriction at CTA10/PART7ZA. The allowance for building societies is also entirely separate from the deductions allowance available to companies as part of the general loss restriction (see BKM305500).

A building society itself has access to the allowance automatically. The building society may also allocate an amount of the allowance to any banking company in the building BKM306800 and BKM306850 respectively.

A banking company which has an amount of allowance for building societies can designate any relevant carried-forward losses as unrestricted for the purposes of the bank loss restriction. The designation is done in the company’s tax return in accordance with the rules in FA98/Schedule 18/Part 9D. The designation can be included in an original return or as an amendment to a return. This must be done within the normal time limits for an original return or an amendment to a return (including under enquiry conditions).

The maximum amount a banking company can designate is the amount of allowance the company has, which has not been allocated (or re-allocated) to another company. Once an amount of relevant carried-forward relief is designated under S269CH, the normal rules will apply and the relief is not restricted by the bank loss restriction but may, from 1 April 2017, be restricted by the general loss restriction at CTA10/PART7ZA.

Example (pre-1 April 2017)

  • In its accounting period ending 31 March 2016, the building society, BSX, has relevant carried-forward trading losses of £10m, and trading profits of the period of £2m. BSX does not have any other relief for the period.
  • BSX is using its own one-off allowance for building societies, and has £1m of allowance available.

Under the restriction BSX would have relevant trading profits of £2m, so would be able to use £1m of carried-forward losses. This would leave taxable total profits of £1m.

BSX designates £1m of carried forward trading losses as unrestricted.

BSX now has relevant trading profits of £1m (£2m less £1m carried-forward), so is able to use £0.5m of restricted relief. This leaves taxable total profits of £0.5m.

Example (post-1 April 2017)

  • In its accounting period ending 31 December 2020, the building society, BSX, has relevant carried-forward trading losses of £10m and trading profits of the period of £2m. BSX does not have any other relief for the period.
  • BSX is using its own one-off allowance for building societies, and has £1m of allowance available.
  • BSX does not have a deductions allowance (see BKM305500). All of the group’s deductions allowance has been allocated to other companies.

For the purposes of the restriction, BSX therefore has relevant trading profits and relevant total profits of £2m (BKM305600).

Ignoring the building society allowance, the maximum amount of relief the company would be able to obtain for relevant carried-forward trading losses is 25% of £2m = £0.5m relevant carried-forward losses, in accordance with the bank loss restriction.

The maximum amount of relief the company can obtain for carried-forward losses subject to the general restriction on relief introduced from 1 April 2017 (CTM05000+) is 50% of £2m = £1m. This applies to carried-forward losses of any of the types subject to the general loss restriction (CTM05020), including the company’s relevant carried-forward losses. The general restriction sets an overall limit, and includes any of the up to £0.5m relevant carried-forward losses the company could use in accordance with the bank loss restriction.

All of the company’s losses are relevant carried-forward trading losses, which are subject to the bank loss restriction. This means that without the allowance for building societies, the company would only be able to use £0.5m of carried-forward losses, as this is the maximum amount of relief available in accordance with the bank loss restriction. This would leave taxable total profits of £1.5m.

However, BSX designates £0.5m of relevant carried-forward trading losses as unrestricted.

The calculation of BSX’s relevant profits is unchanged. This is because as of 1 April 2017, any losses subject to the general loss restriction are not deducted in the calculation of relevant profits (see BKM305400).

What has changed is the amount of relief BSX is able to obtain for its carried-forward losses. BSX now has £0.5m carried-forward losses not subject to the bank loss restriction. This is the £0.5m it designated as unrestricted.

These losses are still subject to the general loss restriction, but BSX still has £0.5m capacity remaining of the £1m maximum calculated above in accordance with the general restriction.

BSX can therefore deduct £0.5m relevant carried-forward trading losses, in accordance with the bank loss restriction, and an additional £0.5m carried-forward trading losses which it has designated as unrestricted.

The result is a total of £0.5m plus £0.5m = £1m deducted from £2m profits, leaving taxable total profits of £1m.