BKM309200 - Bank loss restriction: commencement rules: periods straddling 1 April 2017
F(No 2)A/Schedule 4/Part 12/Paragraphs 190-192
The amendments to legislation made by Schedule 4 Finance Act (No 2) 2017 (which contains provisions relating to relief for losses carried forward) have effect from 1 April 2017 (Para 190(1)).
These amendments introduced a general restriction on relief for carried-forward losses. The general loss restriction restricts the relief that companies of all types, including banks, can obtain for carried-forward losses sustained at any time. However, the bank loss restriction still creates an additional restriction on the relief available to banks.
The amendments made by Schedule 4 also altered the way in which the bank loss restriction is calculated with effect from 1 April 2017 to align with the calculation of the general restriction. BKM305000 has more details.
For the purposes of applying those amendments, where a company has an accounting period that straddles 1 April 2017, the periods falling before and after that date are treated as separate accounting periods (Para 190(2)).
In some circumstances, it may be necessary to apportion profits, losses or deductions (described in Para 190(2) as amounts) of the straddling accounting period in order to determine how much of these amounts fall before and after 1 April 2017.
Where apportionment is necessary, the apportionment should be made on a time basis in accordance with CTA10/S1172. However, if time apportionment produces a result that is not just and reasonable, an alternative just and reasonable basis should be used.
Draft guidance on the commencement provisions for the reform of Corporation Tax loss relief has been published online.
The example below shows a calculation involving the commencement provisions for a company subject to the bank loss restriction.
Example
In its accounting period from 1 January to 31 December 2017, Company A has:
- £80 million trading losses accrued before 1 April 2015, carried forward for relief against profits of the same trade under CTA10/S45,
- £20 million trading losses accrued from 1 April 2015, carried forward for relief against profits of the same trade under CTA10/S45, and
- Trading profits of £21 million.
Assume for the purposes of the example that:
- The company is a standalone company and has access to a full £5 million deductions allowance per twelve-month period, from the commencement date of 1 April 2017. The entire deductions allowance is set against trading profits.
- The company uses Pre-1 April 2015 losses to the full extent possible before using any Post-1 April 2015 losses.
For simplicity, in this example, apportionment on a time basis has been made by reference to months. In practice, this should normally be made by reference to days..
Step 1
Apportion in-year profits, losses and other amounts to two notional periods, the first beginning 1 January 2017 and ending 31 March 2017, the second beginning 1 April 2017 and ending 31 December 2017 (F(No 2)A17/SCH4/PART12/PARA190).
| Trading profits for the period | Amount (£) |
|---|---|
| 1/1/17 to 31/3/17 | 5,250,000 |
| 1/4/17 to 31/12/17 | 15,750,000 |
Calculate the deductions allowance for the second notional period, pro rata (CTA10/S269ZW(3)).
- Deductions allowance for 1/4/17 to 31/12/17: 9/12 multiplied by £5 million gives £3.75 million.
There is no deductions allowance for 1/1/17 to 31/3/17 because the deductions allowance was introduced on 1 April 2017 as part of the amendments in Schedule 4.
There is no need to apportion amounts brought forward from previous periods. These are carried forward against profits of the first notional period, with any balance remaining carried forward against profits of the second notional period.
Step 2
Calculate the net result for the first notional period.
| Description | Amount (£) |
|---|---|
| Trading profits from [1/1/17 to 31/3/17] | 5,250,000 |
| less: | - |
| 1 April 2015 to 31 March 2017 trading losses carried forward (not subject to the bank loss restriction) | (5,250,000) |
| Relevant trading profits (pre-1 April 2017 bank loss restriction calculation) (CTA10/S269CD): | Nil |
| Net profits | Nil |
| Pre-1 April 2015 trading losses carried forward to the next notional period | (80,000,000) |
| 1 April 2015 to 31 March 2017 trading losses carried forward to the next notional period | (14,750,000) |
Step 3
Calculate the bank loss restriction and general loss restriction for the second notional period, in accordance with the post-1 April 2017 rules. There is no need to calculate maximum relief for non-trading or total profits, as the company only has trading profits and its only losses are trading losses carried forward against profits of the same trade.
| Description | Amount (£) |
|---|---|
| Modified total profits [from 1/4/17 to 31/12/17] (CTA10/S269ZF(3) step 1) | 15,750,000 |
| Less in-year reliefs deducted from total profits (S269ZF(3) steps 2 and 4) | nil |
| Qualifying trading profits (S269ZF(3) step 5) | 15,750,000 |
| Deductions allowance (S269ZB(7), S269ZW) | (3,750,000) |
| Relevant trading profits (S269ZF(1)) | 12,000,000 |
| Restriction on deductions for trading losses (bank loss restriction): 25% of relevant trading profits (S269CA(2)) | 3,000,000 |
| Relevant maximum for trading profits (general loss restriction): 50% of relevant trading profits plus £3.75 million deductions allowance (S269ZB(5)) | 9,750,000 |
The company uses Pre-1 April 2015 trading losses up to the full £3 million amount allowed in accordance with the bank loss restriction.
This leaves it with capacity to use another £9.75 million less £3 million = £6.75 million trading losses incurred in periods from 1 April 2015 to 31 March 2017 and carried forward under CTA10/S45. It does so.
Step 4
Calculate the net result for the second notional period.
| Description | Amount (£) |
|---|---|
| Trading profits [from 1/4/17 to 31/12/17] | 15,750,000 |
| less: | - |
| Pre-1 April 2015 trading losses carried forward | (3,000,000) |
| 1 April 2015 to 31 March 2017 trading losses carried forward | (6,750,000) |
| Net profits | 6,000,000 |
Step 5
Compute the profits chargeable for the straddling accounting period.
| Description | Amount (£) |
|---|---|
| Trading profits [from 1/1/17 to 31/12/17] | 21,000,000 |
| Trading losses carried forward against profits of the same trade | (15,000,000) |
| Profits chargeable | 6,000,000 |
Losses carried forward to the next accounting period:
| Description | Amount (£) |
|---|---|
| Pre-1 April 2015 trading losses carried forward | (77,000,000) |
| 1 April 2015 to 31 March 2017 trading losses carried forward | (8,000,000) |