CTM05250 - Corporation tax: restriction on relief for carried-forward losses: example 2: company using streamed and relevant deductions

Most trading losses and NTLRDs arising after 1 April 2017 will benefit from the relaxation, which allows relief against total profits of the company. In addition, companies with management expenses, property business losses or non-trading losses on intangible fixed assets that arose either before or after 1 April 2017 will generally be able to deduct these from their total profits.

Carried-forward trading losses and non-trading loan relationship deficits (NTLRDs) that arose before 1 April 2017 can only be set against trading profits and non-trading profits respectively. This also applies to certain post-1 April 2017 losses, for example where a trade or investment business becomes small or negligible (CTM04115).

Where a company has both:

  • Streamed restricted carried-forward losses (CTM05020), which can only be set against a particular type of profit, and
  • Restricted carried-forward losses that are relevant deductions and can be deducted from total profits,

Then it is necessary to calculate the relevant maxima for trading, non-trading and total profits.

The following example sets out the steps to be taken for each type of loss.

Example

Company B has an accounting period ending 31 March 2021. In that period, its profits are as follows:

  • Trading profits of £35 million,
  • A non-trading loan relationship credit of £15 million.

Its in-year reliefs (CTM05060) are:

  • Management expenses of £5 million,
  • Group relief claimed from a group company of £2 million.

This gives a total of £7 million. It chooses to set £3 million against trading profits and £4 million against non-trading profits.

The company’s carried-forward losses as at the beginning of the period are:

  • Pre-1 April 2017 trading losses of £15 million,
  • Pre-1 April 2017 NTLRDs of £1 million,
  • Post-1 April 2017 trading losses of £8 million,
  • Post-1 April 2017 NTLRDs of £2 million.

None of the circumstances which could remove the relaxation from the post-1 April 2017 trading losses or NTLRDs have arisen, so both can be deducted from total profits.

The company has been allocated the full £5 million of its group deductions allowance and it chooses to set the full amount against trading profits.

The company is not a life insurance company.

Steps 1 to 4

The first four steps apply for the company’s calculation of its relevant maxima for trading, non-trading and total profits.

1- Calculate the modified profits (CTA10/S269ZF(3) Step 1, CTM05040). This is the total profits of £50 million before deduction of the in-year management expenses and group relief.

2- Compute the in-year reliefs (CTA10/S269ZF(3) Step 2). These are amounts that can be deducted from total profits, but not excluded deductions. These will be the £5 million management expenses and the £2 million group relief.

3- Divide the total profits into trading and non-trading profits (CTA10/S269ZF(3) Step 3, CTM05050). The trading profits are £35 million, leaving non-trading profits of £15 million.

4- Allocate the in-year reliefs between trading and non-trading profits (CTA10/S269ZF(3) Step 4, CTM05060). The company chooses to allocate £3 million to trading profits and £4 million to non-trading profits.

Relevant maximum for trading profits

The amount of the pre-1 April 2017 trading losses that may be used is computed as follows:

5- Compute the qualifying trading profits (CTA10/S269ZF(3) Step 5, CTM05070). The qualifying trading profits are the trading profits of £35 million minus the £3 million in-year reliefs allocated to trading profits, giving £32 million.

6- Compute the relevant trading profits (CTA10/S269ZF(1), CTM05080). These are the £32 million qualifying trading profits minus the £5 million trading profits deductions allowance which gives £27 million.

7- Calculate the relevant maximum for trading profits (CTM05090). This is 50% of the relevant trading profits plus the trading profits deductions allowance:

£27 million x 50% + £5 million = £18.5 million.

This is the maximum amount of pre-1 April 2017 trading losses that can be deducted from trading profits of the period.

The company had £15 million trading losses carried forward at the start of the period. This is less than the £18.5 million relevant maximum, so the full £15 million will be deducted from trading profits of the period unless the company chooses otherwise (CTM05090).

The company allows the full £15 million to be deducted. This leaves unused pre-1 April 2017 trading losses of nil.

Relevant maximum for non-trading profits

The amount of the pre-1 April 2017 NTLRDs that may be used is computed as follows:

8- Compute the qualifying non-trading profits (CTA10/S269ZF(3) Step 5, CTM05070). The qualifying non-trading profits are the non-trading profits of £15 million minus the in-year reliefs allocated to non-trading profits of £4 million, giving £11 million.

9- Compute the relevant non-trading profits (CTA10/S269ZF(2), CTM05080). There is no deductions allowance available to set against the qualifying non-trading profits, since the company chose to allocate its entire deductions allowance to trading profits, and so the amount of the relevant non-trading profits is £11 million.

10- Calculate the relevant maximum for non-trading profits (CTA10/S269ZC(3), CTM05090). This is 50% of the relevant non-trading profits plus the non-trading profits deductions allowance (which is nil):

£11 million x 50% + nil = £5.5 million.

This is the maximum amount of pre-1 April 2017 NTLRDs that can be deducted from non-trading profits of the period.

The company had pre-1 April 2017 NTLRDs carried forward of £1 million, and so the full £1 million will be deducted from non-trading profits of the period unless the company chooses otherwise (CFM32040).

The company allows the full £1 million to be deducted. This leaves unused pre-1 April 2017 NTLRDs of nil.

Relevant maximum for total profits

The maximum amount of profits that can be set off by restricted carried-forward losses available for relief against total profits (relevant deductions) (CTM05020) is computed as follows:

11- Calculate the relevant profits (CTA10/S269ZFA, CTM05080). This is the modified total profits minus any in-year reliefs (steps 1 and 2), less the company’s deduction allowance for the AP.

£27 million qualifying trading profits less the deductions allowance (step 6, above) + £11 million qualifying non-trading profits (step 9) = £38 million.

12- Calculate the relevant maximum for total profits (CTA10/S269ZD(4), CTM05090). This is 50% of the relevant profits plus the amount of the deductions allowance:

£38 million x 50% + £5 million = £24 million.

This is the overall maximum amount of restricted carried-forward losses that the company can deduct from its profits of the accounting period, including streamed restricted losses and relevant deductions. At steps 7 and 10, the company chose to deduct £15 million pre-1 April 2017 trading losses carried forward and £1 million pre-1 April 2017 NTLRDs carried forward from its trading and non-trading profits, respectively. It needs to subtract these from its relevant maximum for total profits to find its remaining capacity to use restricted carried-forward losses.

13- Subtract from the relevant maximum for total profits all streamed restricted carried-forward losses that the company will use in the period.

The relevant maximum for total profits of £24 million less £15 million pre-1 April 2017 trading losses and £1 million pre-1 April 2017 NTLRDs gives £8 million.

The company therefore has £8 million remaining capacity to deduct restricted carried-forward losses from its total profits.

The company has £8 million post-1 April 2017 trading losses and £2 million post-1 April 2017 NTLRDs. It does not have capacity to use the full £10 million. In this case, the company makes claims to deduct £2 million post-1 April 2017 NTLRDs carried forward and £6 million post-1 April 2017 trading losses carried forward from its total profits.

This leaves the company with £2 million post-1 April 2017 trading losses to carry forward to subsequent periods.

Company’s profits chargeable to Corporation Tax

The company’s profits chargeable to Corporation Tax are calculated as follows:

£35 million trading profits less £15 million pre-1 April 2017 trading losses carried forward less pre-1 April 2017 NTLRDs carried forward of £1 million (deducted at CTA10/S4(3) Step 1) gives £20 million.

Add £15 million non-trading loan relationship credit less pre-1 April 2017 NTLRDs carried forward of £1 million (deducted at CTA10/S4(3) Step 1) to give total profits of £34 million.

Less the following amounts, deducted at CTA10/S4(2) Step 2:

  • Management expenses of £5 million,
  • Group relief claimed from a group company of £2 million,
  • Post-1 April 2017 NTLRDs carried forward of £2 million,
  • Post-1 April 2017 trading losses carried forward of £6 million.

This gives profits chargeable to Corporation Tax of £34 - £15 = £19 million.