CREC073300 - Expenditure credit redemption: example 3 - loss-making year 1, profit-making year 2

CT = Corporation Tax 

AP = accounting period

Year 1 

Company 3, Year 1	Values
Loss	(£150,000)
CT liability @ 25%	nil
Credit for this AP	£200,000
Credit brought forward	nil
Credit received from group member(s)	nil
CT liability of other AP(s)	nil
Other liabilities	nil

PRE-STEP 1 RESTRICTION 

The amount of credit brought forward and the amount of credit received from group member(s) are used, in that order, to discharge the CT liability for this AP. 

Company 3 has no brought forward credit or amounts surrendered by a group member, so there is no need to apply the restriction. 

STEP 1 

The credit amount for this AP is used to discharge the CT liability for this AP. 

-	Values
Credit for this AP	£200,000
CT liability	nil
Credit remaining after discharge	£200,000

STEP 2 

If the amount of credit remaining after Step 1 exceeds the initial credit amount net of a notional tax charge, it is to be reduced to the initial credit amount net of a notional tax charge. 

The notional tax charge is at the main rate of CT, 25%. 

-	Values
Amount of credit remaining after Step 1	£200,000
Net credit (£200,000 less 25%)	£150,000
Carry forward lesser amount to Step 3	£150,000
Credit withheld at Step 2	£50,000

The withheld amount is not available as a payable credit now or in future but can be surrendered to a group member or used to discharge CT liability in later years. 

STEP 3 

The amount of credit remaining after Step 2 is used to discharge any liability of the company to pay CT for any other AP. 

-	Values
Credit remaining after Step 2	£150,000
CT liability of other AP(s)	nil
Credit remaining after discharge	£150,000

STEP 4 

If the company is a member of a group, it may surrender some or all of the amount remaining after Step 3 to any other member of the same group. 

-	Values
Credit remaining after Step 3	£150,000
Amount surrendered to group member	nil
Amount remaining after surrender	£150,000

STEP 5 

The amount of credit remaining after Step 4 is used to discharge any other liability of the company to pay a sum to HMRC, eg. VAT or an amount due under a contract settlement. 

-	Values
Credit remaining after Step 4	£150,000
Other liabilities	nil
Credit remaining after discharge	£150,000

STEP 6 

The amount remaining after Step 5 is payable to the company by HMRC, provided that: 

• the company is not in administration or liquidation, 

• HMRC has not opened an enquiry into the company’s tax return, 

• the company does not have unpaid amounts of PAYE, Class 1 NICs or withholding tax for visiting performers. 

Company 3 meets the conditions and receives £150,000 payable credit. 

Summary	Values
Withheld at Step 2	£50,000
Payable at Step 6	£150,000
Total credit for this AP	£200,000

SURRENDER TO GROUP MEMBER 

If the company is a member of a group, it may surrender some or all of the amount withheld at Step 2, plus any credit brought forward and not used at the pre-Step 1 restriction, to any other member of the same group. 

Although Company 3 has £50,000 credit withheld at Step 2, it chooses not to surrender any to group members. 

AMOUNTS CARRIED FORWARD 

Any amount withheld at Step 2 and/or any unused credit brought forward which is not surrendered to a group member is carried forward to the next AP. 

Company 3 has no amount of unused credit brought forward, but it does have £50,000 withheld at Step 2 and not surrendered to a group member. 

Company 3 carries forward £50,000 credit to the next AP, which is brought in at the pre-Step 1 restriction for that AP. 

 

Year 2 

Company 3, Year 2	Values
Profit	£600,000
CT liability @ 25%	£150,000
Credit for this AP	£250,000
Credit brought forward	£50,000
Credit received from group member(s)	nil
CT liability of other AP(s)	nil
Other liabilities	nil

PRE-STEP 1 RESTRICTION 

The amount of credit brought forward and the amount of credit received from group member(s) are used, in that order, to discharge the CT liability for this AP. 

-	Values
Credit brought forward	£50,000
CT liability	£150,000
CT liability after discharge	£100,000
Remaining credit brought forward	nil

STEP 1 

The credit amount for this AP is used to discharge the remaining CT liability for this AP. 

-	Values
Credit for this AP	£250,000
CT liability	£100,000
CT liability after discharge	nil
Credit remaining after discharge	£150,000

STEP 2 

If the amount of credit remaining after Step 1 exceeds the initial credit amount net of a notional tax charge, it is to be reduced to the initial credit amount net of a notional tax charge. 

The notional tax charge is at the main rate of CT, 25%. 

-	Values
Amount of credit remaining after Step 1	£150,000
Net credit (£250,000 less 25%)	£187,500
Carry forward lesser amount to Step 3	£150,000
Credit withheld at Step 2	nil

STEP 3 

The amount of credit remaining after Step 2 is used to discharge any liability of the company to pay CT for any other AP. 

-	Values
Credit remaining after Step 2	£150,000
CT liability of other AP(s)	nil
Credit remaining after discharge	£150,000

STEP 4 

If the company is a member of a group, it may surrender some or all of the amount remaining after Step 3 to any other member of the same group. 

-	Values
Credit remaining after Step 3	£150,000
Amount surrendered to group member	nil
Amount remaining after surrender	£150,000

STEP 5 

The amount of credit remaining after Step 4 is used to discharge any other liability of the company to pay a sum to HMRC, e.g. VAT or an amount due under a contract settlement. 

-	Values
Credit remaining after Step 4	£150,000
Other liabilities	nil
Credit remaining after discharge	£150,000

STEP 6 

The amount remaining after Step 5 is payable to the company by HMRC, provided that: 

• the company is not in administration or liquidation, 

• HMRC has not opened an enquiry into the company’s tax return, 

• the company does not have unpaid amounts of PAYE, Class 1 NICs or withholding tax for visiting performers. 

Company 3 meets the conditions and receives £150,000 payable credit. 

Summary	Values
Discharge at Step 1	£100,000
Payable at Step 6	£150,000
Total credit for this AP	£250,000

SURRENDER TO GROUP MEMBER 

If the company is a member of a group, it may surrender some or all of the amount withheld at Step 2, plus any credit brought forward and not used at the pre-Step 1 restriction, to any other member of the same group. 

Company 3 has no amount of credit withheld at Step 2 or unused credit brought forward, so there is no need to consider a surrender. 

AMOUNTS CARRIED FORWARD 

Any amount withheld at Step 2 and/or any unused credit brought forward which is not surrendered to a group member is carried forward to the next AP. 

Company 3 has no amount of credit withheld at Step 2 or unused credit brought forward, so there is no amount carried forward.