CTM04970 - Corporation tax: CT loss reform: commencement: example 7: company makes overall profit due to the effects of the corporate interest restriction

Before reading this example, refresh the note concerning examples at CTM04900, which sets out the key assumptions made.

Introduction

Different commencement provisions apply where a company has an amount of interest that is restricted under the corporate interest restriction at TIOPA10/PART10, which has effect from 1 April 2017 (CTM04890).

The company’s profits relate to a trade and a property business, but the effect of the interest restriction has been to reduce the company’s NTLRDs, meaning that there is an amount in respect of which Corporation Tax relief is available which would have been greater but for TIOPA10/PART10 (F(2)A17/PARA191 (1)(c)(ii)).

Example

In its accounting period from 1 January 2017 to 31 December 2017, Company G has:

• £3,300,000 property business profits,
• £2,000,000 NTLRDs, and
• £3,000,000 property business losses brought forward from previous accounting periods.

The company’s interest restricted under TIOPA10/PART10 is £1,500,000. This relates entirely to NTLRDs. But for the corporate interest restriction, the company’s NTLRDs arising in this period would have been £3,500,000. In computing the corporate interest restriction, any apportionments made in computing amounts relating to disregarded periods have been made on a time basis and, in the circumstances, this approach was considered to be just and reasonable (see CTM04890).

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.

An amount in respect of which relief is available (the NTLRDs) has been made smaller due to the effects of the interest restriction. Therefore, the company calculates the apportionment of NTLRDs that would have arisen if the interest restriction had not applied. This would have meant apportioning a total of £3,500,000 NTLRDs: £875,000 to the first notional period and £2,625,000 to the second period.

Due to the interest restriction, in practice, the company only has £2,000,000 NTLRDs. The company still apportions £875,000 NTLRDs to the first notional period, as the interest restriction was not in effect before 1 April 2017. The company apportions the remaining NTLRDs, £1,125,000, to the second notional period.

The remaining amounts are unaffected by the interest restriction.

1 January 2017 to 31 March 2017	£
Property business profits	825,000
NTLRDs arising	(875,000)

1 April 2017 to 31 December 2017	£
Property business profits	2,475,000
NTLRDS arising	(1,125,000)

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 January 2017 to 31 March 2017	£
Property business profits	825,000
NTLRDs arising, set against profits of the notional period	(825,000)
Net profits	nil
NTLRDs arising, carried forward to period commencing 1 January 2018 as a pre-1 April 2017 loss*	(50,000)
Property business loss brought forward and carried forward to next notional period	(3,000,000)

*Although the NTLRDs are apportioned in order to calculate the loss restriction and determine what amounts were incurred pre- and post-1 April 2017, in-year relief 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.

However, the company may choose an alternative treatment of its NTLRDs, as set out at CTM04880. Technically, in-year relief for NTLRDs arising before 1 April 2017 is claimed under CTA09/S461, whereas in-year relief for NTLRDs arising from that date is claimed under CTA09/S463B. The company can therefore choose to treat the NTLRDs arising as apportioned to the pre- and post-1 April 2017 periods for purposes beyond calculating the effects of the loss reform, and could, for example, treat them as carried forward from the deemed period to 31 March 2017 into the deemed period beginning 1 April 2017.

In this case, the company does not make this choice. An example of a company that does choose the alternative treatment is available at CTM04920.

This alternative treatment is only available for NTLRDs, due to the introduction of CTA09/PART5/CHAPTER16A for periods from 1 April 2017.

Step 3

Calculate the relevant maximum for the second notional period, in accordance with the loss restriction.

1 April 2017 to 31 December 2017	£
Modified total profits (CTA10/S269ZF (3) step 1)	2,475,000
Less amounts deducted from total profits (excluding brought forward property losses) (S269ZF (3) steps 2 and 4):	-
NTLRDs arising	(1,125,000)
Qualifying trading profits (S269ZF (3) step 5)	1,350,000
Relevant trading profits and relevant profits (S269ZF (1) and S269ZD (5))\n(assume no deductions allowance)	1,350,000
Relevant maximum (S269ZD (4))	675,000

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/S269ZB (5), S269ZC (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 April 2017 to 31 December 2017	£
Property business profits	2,475,000
Less NTLRDs arising	(1,125,000)
Less property business loss brought forward	(675,000)
Net profits	675,000
Remaining property business loss brought forward, carried forward to the accounting period beginning 1 January 2018	(2,325,000)

Step 5

Compute the profits chargeable to Corporation Tax for the straddling accounting period.

1 January 2017 to 31 December 2017	£
Property business profits	3,300,000
NTLRDs arising	(1,950,000)
Property business loss brought forward	(675,000)
Profits chargeable to Corporation Tax	675,000

The following amounts are carried forward to the period commencing 1 January 2018. Both are pre-1 April 2017 losses.

• £2,325,000 unused property business loss brought forward from previous periods, and
• £50,000 NTLRDs arising in the first notional period.