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Dealing with a corporate trading loss

Victoria Cavell explains how companies can use trading losses to their advantage

September 2017

Companies can make trading losses. These could arise because a company made an accounting loss, so the ‘profit before tax’ figure is actually a ‘loss before tax’. Alternatively, a trading loss can occur due to the adjustments to profit calculation turning an accounting profit into a trading loss for tax purposes. For example, if there is only a little depreciation to add back but lots of capital allowances to deduct a trading loss can arise as a result.
A company can use the trading loss to reduce its other profits and hence pay less tax overall. Here we shall have a look at how the company can use these trading losses.
Companies are quite straightforward, there is a set order for using the loss as follows:
1. Current year claim
First, claim to use the loss against all other profits (before offsetting qualifying charitable donations) in the period of the loss. This is an ‘all-or-nothing’ claim, so in other words either all of the loss must be offset or the profits must be reduced to nil.
2. Carry back claim
The loss can be carried back and used against all other profits arising in the previous 12 months (before offsetting qualifying charitable donations). Again, this is another all-or-nothing claim, but can only be made AFTER the current year claim. So the order is set: current year claim first, then carry back.
3. Carry forward
Any remaining trading loss is carried forward automatically. The brought forward loss can only be set off against the first available future trading profits from the same trade. As much loss as is possible must be offset. The deadline for making the current year and the carry back claims is two years from the end of the loss making period.
Both the current year and carry back are ‘claims’, so they are choices, the company does not have to use the loss in this way. However, if a company does want to do the carry back claim, they MUST do the current year claim first. The carry forward of unused losses is automatic.
Most companies want to use the loss to save tax in as early a period as possible. Why wait and carry the loss forward for future relief when it can only be set off against trading profits? The company would have to be very sure it was indeed going to make trading profits in the future to get use out of the loss. So our path for trading loss relief is clear – current year, carry back, then carry forward.
For further information on these trading loss reliefs for a company refer to s37 and 45 CTA 2010.
• Victoria Cavell is a tutor at Tolley Exam Training, part of LexisNexis. She can be contacted on 020 3364 4500 or examtraining@lexisnexis.co.uk

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