CTM04950 - Corporation tax: CT loss reform: commencement: example 5: company makes overall profit in the AP straddling 1 April 2017: carried-forward losses relieved in the period and losses carried-forward from the period
Before reading this example, refresh the note concerning examples at CTM04900, which sets out the key assumptions made.
Example
In its accounting period from 1 January 2017 to 31 December 2017, Company E has:
- Trade profits of £1,000,000,
- Property business losses arising of £200,000
- Non-trading losses on intangible fixed assets (NTLIFAs) brought forward of £200,000
- Management expenses brought forward of £400,000.
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.
| £ | |
|---|---|
| 1/1/17 to 31/3/17 | |
| Trade profits | 250,000 |
| Property business loss arising | (50,000) |
| 1/4/17 to 31/12/17 | |
| Trade profits | 750,000 |
| Property business loss arising | (150,000) |
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.
| £ | |
|---|---|
| 1/1/17 to 31/3/17 | |
| Trade profits | 250,000 |
| Management expenses brought forward and used in this notional period* | (250,000) |
| Net profits | nil |
| Remaining management expenses brought forward, carried-forward to next notional period | (150,000) |
| NTLIFAs brought forward and carried-forward to next notional period | (200,000) |
| Property business loss arising, carried-forward to period commencing 1 January 2018 as a pre-1 April 2017 loss** | (50,000) |
*For periods prior to 1 April 2017, deductions for management expenses are made before any other deduction in the calculation of total profits (CTA09/S1219 (1A)). From 1 April 2017, this only applies to management expenses incurred in the period in which the deduction is made, and not to management expenses carried-forward.
**Although the property business loss is apportioned in order to calculate the loss restriction and determine how much was incurred pre- and how much post-1 April 2017, in-year relief under CTA10/S62 relates to the straddling period as a whole. Any surplus is therefore carried -forward from the straddling period to the accounting period commencing 1 January 2018.
Step 3
Calculate the relevant maximum for the second notional period, in accordance with the loss restriction.
| £ | |
|---|---|
| 1/4/17 to 31/12/17 | |
| Modified total profits (CTA10/S269ZF (3) step 1) | 750,000 |
| Less amounts deducted from total profits (excluding brought forward property losses) (S269ZF (3) steps 2 and 4): | |
| Property business loss arising | (150,000) |
| Qualifying trade profits (S269ZF (3) step 5) | 600,000 |
| Relevant trade profits and relevant profits (CTA10/S269ZF (1) and S269ZD (5))\n(assume no deductions allowance) | 600,000 |
| Relevant maximum (S269ZD (4)) | 300,000 |
The relevant maximum gives the total amount of profits that can be relieved using losses brought forward, with the exception of losses such as allowable capital losses that are outside the scope of the loss restriction until 1 April 2020.
There is no need to calculate trade and non-trade relevant maxima (CTA10/S279ZB (5) and S279ZC (3)) since all of the company’s losses brought forward are available for relief against total profits.
Step 4
Calculate the net result for the second notional period.
| £ | |
|---|---|
| 1/4/17 to 31/12/17 | |
| Trade profits | 750,000 |
| Less: | |
| Property business loss arising | (150,000) |
| NTLIFAs brought forward (set against 200,000 of the 300,000 relevant maximum) | (200,000) |
| Management expenses brought forward (set against the remaining 100,000 of the relevant maximum) | (100,000) |
| Net profits | 300,000 |
| Remaining management expenses brought forward, carried-forward to the accounting period beginning 1 January 2018 | (50,000) |
Step 5
Compute the profits chargeable to Corporation Tax for the straddling accounting period.
| 1/1/17 to 31/12/17 | £ |
|---|---|
| Trade profits | 1,000,000 |
| Property business loss arising | (150,000) |
| NTLIFAs brought forward | (200,000) |
| Management expenses brought forward | (350,000) |
| Profits chargeable to Corporation Tax | 300,000 |
The following amounts are carried forward to the period commencing 1 January 2018. Both are pre-1 April 2017 losses.
- £50,000 unused management expenses brought forward from previous periods, and
- £50,000 property business loss arising in the first notional period.