CTM05260 - Corporation tax: restriction on relief for carried-forward losses: examples 3 and 4: companies using relevant deductions only

The following examples show the steps taken in computing the amount of losses that can be used in a case where the only restricted carried-forward losses are relevant deductions (CTM05020), which can be set against total profits. These could be post-1 April 2017 trading losses or NTLRDs carried forward and available for relief against total profits, or they could be management expenses, property business losses or non-trading losses on intangible fixed assets from any period.

Example 3

Company C has an accounting period ending 31 March 2020. In that period, its profits are as follows:

  • Trading profits of £20 million,

  • Property business profits of £5 million.Its in-year reliefs (CTM05060) are:

  • Non-trading loan relationship deficits (NTLRDs) of £4 million,The company’s carried-forward losses as at the beginning of the period are:

  • Post-1 April 2017 trading losses of £15 million.

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

The company is not in a group and has a full £5 million deductions allowance.

The company is not a life insurance company.

Relevant maximum for total profits

Since all of the company’s restricted losses carried forward are relevant deductions and can be deducted from total profits, there is no need to calculate relevant maxima for trading and non-trading profits.

There is therefore no need for the company to take the steps included in the examples at CTM05240 and CTM05250, where it divides its modified total profits into trading and non-trading profits and allocates its in-year reliefs against these two types of profit.

The company calculates its relevant maximum for total profits as follows:

  1. Compute the modified total profits (CTA10/S269ZF(3) Step 1, CTM05040). These are the company’s total profits of £25 million for the accounting period, before deduction of the in-year reliefs of £4 million.
  2. Compute the in-year reliefs (CTA10/S269ZF(3) Step 2). These are amounts that can be deducted from total profits but which are not excluded deductions. These therefore include the £4 million NTLRDs but exclude the £15 million trading losses carried forward.
  3. Compute the qualifying profits (CTA10/S269ZF(3) Step 5, CTM05070). These are the modified total profits, less in-year reliefs:£25 million - £4 million = £21 million qualifying profits.
  4. Compute the relevant profits (CTA10/S269ZF(1) and (2) and CTA10/S269ZFA), CTM05080). These are the qualifying profits less the company’s deductions allowance, which in this case is a full £5 million.£21 million - £5 million = £16 million.
  5. Calculate the relevant maximum (CTA10/S269ZD(4), CTM05090). This is 50% of the relevant profits plus the amount of the deductions allowance:£16 million x 50% + £5 million = £13 million.

This is the overall maximum amount of restricted carried-forward losses that the company can deduct from its profits of the accounting period. Since the company has no streamed restricted carried-forward losses, it can use relevant deductions up to the full £13 million amount.

The company’s only relevant deductions are its £15 million post-1 April 2017 trading losses carried forward against total profits. It uses the full £13 million possible. The balance of £2 million is carried forward to the following period.

Company’s profits chargeable to Corporation Tax

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

£20 million trading profits plus £5 million property business profits gives total profits of £25 million.

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

  • Non-trading loan relationship deficits (NTLRDs) of £4 million,
  • Post-1 April 2017 trading losses of £13 million.

This gives profits chargeable to Corporation Tax of £25 - £17 = £8 million.

Example 4

Company C has an accounting period ending 30 September 2018. In that period, its profits are as follows:

  • Trading profits of £20 million,

  • Property business profits of £5 million.Its in-year reliefs (CTM05060) are:

  • Non-trading loan relationship deficits (NTLRDs) of £1 million,

  • Group relief claimed from a group company of £3 million.The company’s carried-forward losses as at the beginning of the period are:

  • Property business losses of £12 million.

The company has been allocated £2 million of the group deductions allowance.

The company is not a life insurance company.

Relevant maximum for total profits

As in example 3, above, all of the company’s restricted carried-forward losses are relevant deductions, and so there is no need to divide amounts between trade and non-trade.

The company calculates its relevant maximum for total profits as follows:

  1. The company’s modified total profits for the accounting period are £25 million.
  2. The total amount of in-year reliefs that the company claims a deduction for are group relief of £3 million and NTLRDs of £1 million. These amounts are deducted from the modified total profits to arrive at the qualifying profits of £21 million.
  3. Deduct the company’s allocated deductions allowance of £2 million to arrive at the relevant profits of £19 million.
  4. Calculate the relevant maximum by adding 50% of the relevant profits to the deductions allowance:£19 million x 50% + £2 million = £11.5 million.

This is the overall maximum amount of restricted carried-forward losses that the company can deduct from its profits of the accounting period. Since the company has no streamed restricted carried-forward losses, it can use relevant deductions up to the full £11.5 million amount.

The company’s only relevant deductions are its £12 million property business losses. Since carried-forward losses of this type could be deducted from total profits before 1 April 2017, it does not matter whether the property business losses were incurred before or after that date.

The company chooses to deduct the full £11.5 million carried-forward property business losses allowable, in accordance with the restriction. The balance of £0.5 million is carried forward to the following period.

Company’s profits chargeable to Corporation Tax

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

£20 million trading profits plus £5 million property business profits gives total profits of £25 million.

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

  • Non-trading loan relationship deficits (NTLRDs) of £1 million,
  • Group relief claimed from a group company of £3 million,
  • Property business losses carried forward of £11.5 million.

This gives profits chargeable to Corporation Tax of £25 - £15.5 = £9.5 million.