RPDT20440 - The charge to RPDT: reliefs: restrictions on RPDT relief - section 42 Finance Act 2022

Relief for carried forward losses for Corporation Tax is subject to a restriction so that profits may not be reduced by more than 50%, subject to an annual deductions allowance of £5m.  A similar restriction applies to the use of carried forward RPDT losses and the rule is to be found at FA22/S42. This restriction applies to the elements labelled C and E in the formula that determines a company’s RPD profits for an accounting period in FA22/S38: relief for the company’s own carried forward losses and group relief that it claims for carried forward losses.  

The way the loss restriction applies for RPDT is that there is a 50% restriction on the use of losses that are set against profits that are actually charged to RPDT, those that exceed the allowance available to the company.

But carried forward losses will also be “used” to the extent they cover RPD profits that are not charged because they are below the allowance.

The legislation gives effect to this slightly differently depending on whether the company’s profits are below or above the available allowance.

The legislation

FA22/S42(1) provides that there is a limit on the amount of RPD losses that are carried forward from an earlier accounting period that can be deducted in calculating RPD profits or losses of a later period in accordance with formula provided in FA22/S38.  Elements C and E in that formula are affected by any restriction.

FA22/S42(2) deals with the situation where a company’s RPD profits – including any attributable joint venture amount - are below its available annual allowance.  Then the maximum amount of relief for carried forward losses is the amount that would reduce the company’s RPD profits to nil.

FA22/S42(3) to (5) deal with the situation where a company’s RPD profits exceed its available annual allowance.  Then the amount of relief for carried forward losses is the amount that will reduce the profits that are chargeable to RPDT by 50%. This is achieved through applying the formula set out in FA22/S42(3) –

(A + B – Z) / 2 – D

This uses the terms in FA22/S38 and Z is the company’s amount of annual allowance for the accounting period.

Where a restriction under FA22/S42(3) has applied then the RPD losses remaining to carry further forward are reduced by the sum of the relief that has been given (after the reduction) and the annual allowance available to the company for the period, FA22/S42(4).

How the restriction works: gross profits below allowance

Where the profits are below the allowance the “maximum amount” of RPD losses that can be set against RPD profits is equal to the amount of the profits below the allowance.  They are “used” and so not carried forward., FA22/S42(2)

For example: company’s gross profits (A + B) are 15m, available allowance is the full £25m.  Carried forward losses are £50m.  The maximum amount of losses that can be used is therefore £15m, leaving £35m to carry further forward.

How the restriction works: gross profits above allowance

Where the profits are above the allowance then –

  • The maximum amount of RPD losses that can be set against RPD profits above the allowance is 50% of the excess.  That is the result of applying the formula in FA22/S42(3).  If there is group relief of same period losses available, then that reduces the restriction, the “- D” in the formula.
  • Then there is an adjustment to reduce the amount of losses that can be carried forward to a later accounting period, so that it reflects both:
    • the amount of restricted losses used against profits above the allowance, and
    • the amount that covers the profits within the allowance.
  • That is achieved by FA22/S42(4) & (5).

Gross profits above allowance: basic example

P Ltd has £60m of losses carried forward.  In the relevant accounting period it makes £30m RPDT profit and the allowance allocated to it is £20m.  Profits exceed its allowance by £10m so the maximum amount of carried forward losses that can be used in the accounting period is £5m. 

In terms of the formula: (£30m – £20m) / 2 - £nil = £5m.  

That means tax is actually charged on £5m:  £30m profits less £5m losses less £20m allowance.

The amount available to carry forward to the next accounting period at this stage is the £60m less the £5m used, £55m. This is then reduced by the amount of P’s allowance of £20m.

In terms of FA22/S42(5) the “total amount” referred to is the £60m less the £5m allowed by FA22/S42(3), £55m.  This adjustment leaves £35m available to carry forward to the subsequent accounting period.

See RPDT20445 for an extended example of how the restriction applies.

RPDT01100 contains a general introduction to RPDT and a list of abbreviations used.