CTM05270 - Corporation Tax: restriction on relief for carried-forward losses: example 5: companies with restricted carried-forward capital losses
Company D has an accounting period ending 31 March 2025. In that period its profits and gains are as follows:
- Trading Profits of £12 million
- Property business profits of £4 million
- Chargeable gains of £10 million
Its in-year reliefs (CTM05060) are:
- Non-trading loan relationship deficits (NTLRDs) of £1 million
The company also has capital losses arising during the AP of £1 million.
The company’s carried-forward losses at the beginning of the period are:
- Pre-1 April 2017 trading losses of £9 million
- Pre-1 April 2017 NTLRDs of £1 million
- Pre-1 April 2020 capital losses of £11 million
- Post-1 April 2017 trading losses of £3 million
- Post-1 April NTLRDs of £2 million
- Excess management expenses of £4 million
The company is not in a group and has access to the full £5 million deductions allowance. It chooses to allocate £1 million to trading profits, £1 million to non-trading income profits and £3 million to chargeable gains.
The company is not a life assurance 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 and chargeable gains.
- Calculate the modified total profits (CTA10/S269ZF(3) Step 1, CTM05040). This is the total profits of £25 million before deduction of the NTLRDs (CTA09/S459(1)(a) and S461) but after the deduction of the in-year capital losses that can only be set against chargeable gains of the period.
- Compute the in-year reliefs (CTA10/S269ZF(3) Step 2). These are amounts that can be deducted from total profits, but not excluded deductions (CTA10/S269ZF(5). These are the £1m NTLRDs
- Divide the modified total profits into trading profits, non-trading income profits and chargeable gains (CTA10/S269ZF(3) Step 3, CTM05050). The trading profits are £12 million, the non-trading income profits are £4 million and the chargeable gains are £9 million.
- Allocate the in-year reliefs between trading profits, non-trading income profits and chargeable gains (CTA10/S269ZF(3) Step 4, CTM05060). The company chooses to allocate the £1 million NTLRDs to 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 £12 million minus the £1 million in-year reliefs allocated to trading profits, giving £11 million. 6. Compute the relevant trading profits (CTA10/S269ZF(1), CTM05080). These are the £11 million qualifying trading profits minus the £1 million trading profits deductions allowance which gives £10 million. 7. Calculate the relevant maximum for trading profits(CTA10/S269ZB(5)) (CTM05090). This is 50% of the relevant trading profits plus the trading profits deductions allowance:£10 million x 50% + £1 million = £6 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 £9 million trading losses carried forward at the start of the period. This is more than the £6 million relevant maximum, so the trading profits of the period will be reduced by a maximum of £6 million unless the company makes a claim under CTA10/S45(4A) or S45B(5) for a lower amount to be deducted (CTM05090). 8. The company choses to use the maximum £6 million allowable in accordance with the restriction. This leaves unused pre-1 April 2017 trading losses of £3 million.Chargeable gains form part of a company’s non-trading profits but where the company has either or both capital losses and NTLRDs, it will need to calculate the relevant maxima for capital gains and total non-trading profits separately. The relevant maximum for capital gains is the amount of carried-forward capital losses that can be off-set against chargeable gains. The relevant maximum for total non-trading profits is the combined amount of carried-forward capital losses and streamed NTLRDs that can be used, with the capital losses being restricted to the amount of the relevant maximum for chargeable gains.
Relevant maximum for chargeable gains
The maximum amount of chargeable gains that can be set off by carried-forward capital losses is computed as follows:
Compute the qualifying chargeable gains (CTA10/S269ZF(3) Step 5, CTM05070).These are the chargeable gains after capital losses of the accounting period are deducted (£9million) minus the in-year reliefs allocated to chargeable gains (nil) giving £9 million.
Compute the relevant chargeable gains (CTA10/S269ZF(2A) CTM05080).These are the £9 million qualifying chargeable gains minus the £3 million chargeable gains deductions allowance, which gives £6 million.
Calculate the relevant maximum for chargeable gains (CTA10/S269ZBA(3) CTM05090).This is 50% of the relevant chargeable gains plus the chargeable gains deductions allowance:
£6 million x 50% + £3 million = £6 million.
This is the maximum amount of carried forward capital losses that can be deducted from chargeable gains of the period.
The company had capital losses of £11 million carried forward at the start of the period and uses the full £6 million allowable in accordance with the restriction.This leaves £5 million capital losses to be carried forward to the next accounting period.
Relevant maximum for total non-trading profits
The maximum amount of total non-trading profits that can be off-set by carried forward capital losses and pre-1 April 2017 NTLRDs is computed as follows: 9. Compute the qualifying non-trading income profits (CTA10/S269ZF(3) Step 5, CTM05070). These are the non-trading income profits of £4 million minus the in-year reliefs allocated to non-trading income profits of nil, giving £4 million. 10. Compute the qualifying chargeable gains. This is £9m. (CTA10/S269ZF(3) Step 5 (see paragraph 9 above)). 11. Compute the total non-trading profits deductions allowance. This is the sum of the non-trading income deductions allowance (£1m) and the chargeable gains deductions allowance (£3m) which is £4m (CTA10/S269ZC(3A)). 12. Compute the total relevant non-trading profits. This is the sum of the qualifying non-trading income profits (£4m) and the qualifying chargeable gains (£9m) minus the total non-trading deductions allowance (£4m) which is £9m. (CTA10/S269ZF(2B)) 13. Compute the relevant maximum for total non-trading profits. This is 50% of the total relevant non-trading profits plus the total non-trading deductions allowance (CTA10/S269ZC(3)).£9m x 50% + £4m = £8.5m 14. The relevant maximum is the maximum amount of streamed non-trading losses (NTLRDs and capital losses) that will be set against the total non-trading profits unless the company makes a claim not to have the full amount of NTLRDs deducted (CTA09/S458 and S463H(7) and CFM32040). In this case, capital losses of £6m are deducted from the chargeable gain. As the chargeable gain forms part of the total non-trading profits, the amount of carried forward streamed NTLRDs that can be set off will be the relevant maximum (£8.5m) minus the capital losses set off (£6m) which is £2.5m 15. The company had £1 million NTLRDs carried forward at the start of the period and chooses to use the full £1 million allowable in accordance with the restriction leaving no unused pre-1 April 2017 NTLRDs to be carried forward to the next accounting period.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: 16. Calculate the relevant profits (CTA10/S269ZFA(1), CTM05080). These are the qualifying profits, less the company’s deduction allowance for the AP (CTA10/S269ZFA(2)). 17. The qualifying profits are the modified total profits minus any in-year reliefs (CTA10/S269ZF(3) steps 1 and 2). The modified total profits are the trading profits £12m, property business profits £4m and chargeable gains (after deduction of capital losses of the period) £9m. This totals £25m. The in-year reliefs are the £1m NTLRDs. The qualifying profits are therefore £24m. 18. The relevant profits are the qualifying profits of £24m minus the company’s deductions allowance of £5m which is £19m. 19. 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:£19 million x 50% + £5 million = £14.5 million.
This is the overall maximum amount of restricted carried-forward losses that the company can deduct from its profits of the accounting period, including streamed restricted losses and relevant deductions. At steps 8, 12 and 19, the company deducted £6 million pre-1 April 2017 trading losses carried forward, £6 million capital losses carried forward and £1 million pre-1 April 2017 NTLRDs carried forward from its trading profits, chargeable gains 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. 20. 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 £14.5 million less £6 million pre-1 April 2017 trading losses, £6 million capital losses and £1 million pre-1 April 2017 NTLRDs gives £1.5 million.
The company therefore has £1.5 million remaining capacity to deduct restricted carried-forward losses from its total profits.
The company has £3 million post-1 April 2017 trading losses, £2 million post-1 April 2017 NTLRDs and £4 million excess management expenses. It does not have capacity to use the full £9 million. In this case, the company makes claims to deduct £1million post-1 April 2017 NTLRDs carried forward and £0.5 million post-1 April 2017 trading losses carried forward from its total profits.
This leaves the company with £2.5 million post-1 April 2017 trading losses, £1 million post 1 April 2017 NTLRDs and £4 million excess management expenses 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:
| Relevant amounts | £m | £m |
|---|---|---|
| Trade profits | 12 | - |
| Less pre-1 April 2017 trading losses carried forward | -6 | 6 |
| UK property business profits | 4 | - |
| Less pre-1 April 2017 NTLRDs | -1 | 3 |
| Capital gain | 10 | - |
| Less capital losses of accounting period | -1 | - |
| Less capital losses carried forward | -6 | 3 |
| Total Profits | - | 12 |
| Less pre-1 April 2017 trading losses | -1 | - |
| Less post-1 April 2017 carried forward NTLRDs | -0.5 | - |
| Less NTLRDs of the accounting period | -1 | - |
| Profits chargeable to CT | - | 9.5 |
£12 million trading profits less £6 million pre-1 April 2017 trading losses carried forward (deducted at CTA10/S4(3) Step 1) gives £6 million.
Add £4 million UK property business profits less pre-1 April 2017 NTLRDs carried forward of £1 million (deducted at CTA10/S4(3) Step 1) to give £3 million.
Add £9 million chargeable gains less £6 million capital losses carried forward giving £3 million and total profits of £12 million.
Less the following amounts, deducted at CTA10/S4(2) Step 2:
- NTLRDs of the accounting period of £1m,
-
Post-1 April 2017 NTLRDs carried forward of £1 million
- Post-1 April 2017 trading losses carried forward of £0.5 million.
This gives profits chargeable to Corporation Tax of £24 - £14.5 = £9.5 million.