VGDC30070 - Losses: taxation - losses - example - losses applied to new video game
Part 15B Chapter 2 Corporation Tax Act 2009 (CTA 2009)
A Video Games Development Company (VGDC) develops Video Game 1 which qualifies for Video Games Tax Relief (VGTR). The company draws up accounts to 31 December.
The separate trade for the purposes of Part 15B CTA 2009 commences on 3 October 2014 and the video game is completed on 10 February 2015. The accounting periods to be considered are:
- 3 October to 31 December 2014
- Year ended 31 December 2015
- Year ended 31 December 2016
The company ceases its video game trade in respect of Video Game 1 on 15 October 2015 when it sells the rights to Video Game 1 outright.
On 17 March 2015, the VGDC commences a new video game trade in relation to Video Game 2 which also qualifies for VGTR.
The computations show:
| Period ended 31 December 2014 | Video Game 1 - £ | Video Game 2 - £ | Other - £ |
|---|---|---|---|
| Income from the video game | 100,000 | - | - |
| Costs of the video game | (850,000) | - | - |
| Video Game Tax Relief - additional deduction | (400,000) | - | - |
| Profit/(loss) on video game | (1,150,000) | - | - |
| Other income - non-trade loan relationship | - | - | 10,000 |
The computation shows a trading loss of £1,150,000 on Video Game 1. The VGDC chooses not to surrender any part of this trading loss for the Video Game Tax Credit (VGTC).
As this is a development accounting period, the loss is restricted and cannot be offset against other income. The interest income (the non-trade loan relationship income) is therefore taxable.
| Period ended 31 December 2015 | Video Game 1 - £ | Video Game 2 - £ | Other - £ |
|---|---|---|---|
| Income from the video game | 500,000 | 800,000 | - |
| Costs of the video game | (150,000) | (400,000) | - |
| Video Game Tax Relief - additional deduction | (100,000) | (300,000) | - |
| Profit/(loss) on video game | 250,000 | 100,000 | - |
| Other income - non-trade loan relationship | - | - | 20,000 |
The computation shows a profit of £250,000 on Video Game 1 and a profit of £100,000 on Video Game 2.
This is the completion period in respect of Video Game 1. It is also the cessation period of the trade.
The brought forward loss of £1,150,000 reduces the profit of Video Game 1 to nil. This leaves an unutilised loss of £900,000 of which:
- £150,000 is attributable to VGTR, and
- £750,000 is not attributable to VGTR.
As this is a completion period, the company can utilise the profits not attributable to VGTR against other profits and carry them back to the previous period. They therefore utilise losses as follows:
| - | Amount |
|---|---|
| Set against other profits of the same accounting period | £120,000 |
| Carried back against profits of the previous period | £10,000 |
| Surrendered as group relief | £200,000 |
| - | £330,000 |
This is the maximum amount that can be relieved. It leaves nil total taxable profits in both periods.
This leaves unutilised losses as follows:
- £150,000 is attributable to VGTR, and
- £420,000 is not attributable to VGTR.
These losses would be stranded without the capacity to claim terminal loss relief.
By claiming terminal loss relief under the VGTR rules, the losses are transferred to the trade of Video Game 2. This trade will therefore treat the full £570,000 losses as brought forward losses in the next accounting period.
| Period ended 31 December 2016 | Video Game 1 - Ceased | Video Game 2 - £ | Other - £ |
|---|---|---|---|
| Income from the video game | - | 1,000,000 | - |
| Costs of the video game | - | (400,000) | - |
| VGTR - additional deduction | - | (200,000) | - |
| Loss on the video game | - | 400,000 | - |
| Other income - non-trade loan relationship | - | - | 50,000 |
The computation for this period shows a trading profit of £400,000 for Video Game 2. The losses deemed to be brought forward of £570,000 are utilised against this profit first.
The profit is reduced to nil and there are £170,000 of losses deemed to be brought forward for Video Game 2 at the beginning of the next period.
These losses can only be used against the profits of the trade of Video Game 2. This is because the legislation states that the losses must be treated as trading losses carried forward under S45 Corporation Tax Act 2010.
The following table shows how the losses from Video Game 1 are used in the various accounting periods:
| - | Video Game 1 - VGTR - £ | Video Game 1 - non-VGTR - £ | Video Game 2 - non-VGTR - £ |
|---|---|---|---|
| APE 31/12/2014 | - | - | - |
| Development period loss | 400,000 | 750,000 | - |
| Losses carried forward into completion period | 400,000 | 750,000 | - |
| APE 31/12/2015 | - | - | - |
| Losses brought forward | 400,000 | 750,000 | - |
| Set off against Video Game 1 profit | (250,000) | - | - |
| Set off against NTLR | - | (20,000) | - |
| Carried back against NTLR of previous period | - | (10,000) | - |
| Surrendered as group relief | - | (200,000) | - |
| Losses carried forward under terminal loss relief rules | 400,000 | 750,000 | - |
| APE 31/12/2016 | - | - | - |
| Losses brought forward | - | - | 570,000 |
| Utilised against profits of Video Game 2 | - | - | (400,000) |
| Losses carried forward | - | - | 170,000 |