Losses

Types of Loss

There are two distinct rates of company taxation on income, namely 12.5% for almost all trading activity and 25% in relation to certain excepted trades and non-trading / passive income, such as rental and dividend income.

Unsurprisingly, the rules in relation to losses require that losses incurred in “12.5%” tax rate trades(all trades except land and investment type trades) are allowed against other profits in the same period or in the previous period on a value basis. This effectively means that 50% of the losses are available (25%/12.52%).They must be first set against profits of the prior period. The losses may also be set against foreign dividends which qualify for 12 ½% tax rate.

Loses in respect of investment income (including rent) may be  offset against future profits or income in the same category. Therefore for example rental losses are offsetable only  against future rental income. In contrast trading losses may generally be offset against profits of the same trade in the preceding period and all profits in the current period.

Losses from trades wholly conducted abroad are effectively ring fenced against those trades. They may be set off only against future profits of the same foreign trade.

Losses and Rates

Most trades are taxed at 12.5 percent. Certain trades including development land minerals and petroleum activities are taxed at 25% . Losses in these trades may be set off of against all the profits of the  year and of the immediately preceding year and carried forward against profits of the same trade .

In the case of normal trading losses i.e.  (12.5% rate) (the vast majority of trades) losses can be set off against the trading income taxed at the same rate and the  trading income of the preceding period of the same length.  It may then be carried forward against the profit of the same trade.

If trading loss cannot be fully absorbed, the company can set off the loss against other income on a value basis.  This reduces the loss to take account of the  fact that losses set against higher rate income are more valuable .

Computation of Losses

Losses are computed in the same way as profits. A loss arises where the resultant figure is negative.  See the separate section on how financial accounts are adjusted to yield taxable trading  profits and losses.

Non-trading income sources are removed from the financial accounts. Many items have a different taxation treatment to accounting treatment, so that an adjustment is made in amount included.  Capital allowances are treated as trading expenses  for companies and are deductible. They are therefore included in the loss computation.

Capital profits / losses  are excluded from the trading profits / loss computation. However, unlike the case with individuals, capital profits and losses are subject to the same tax as on corporate income, Corporation tax. This has the effect that capital losses may reduce the ultimate trading profits in the ultimate Corporation tax calculation.  Gains in relation to development land are not treated in this favorable manner.

Use of Losses

The rules are as follows in relation to losses on  trades and income subject to 25% rate of tax;

• Set off against other profits before charges in the same accounting period;
• Set off against other profits before charges of the preceding accounting period of the same length, if the same trade was carried on in that period;
• Set off against future profits of the trade unless the loss has been used otherwise.

Losses on a trade which is taxable at the standard (12.5%) rate may be set against other profits in the current period or the previous accounting period of the same length.   However, the set off can only be against trading income  taxable at the 12.5% rate.  Such loss may therefore be set off against 12.5% taxable  income of the company in  the previous accounting period of equivalent length. If the previous period is longer or shorter, the amount allowed  must be restricted accordingly.

The option to set off the loss against all income for the current and preceding year does not apply to a trade carried on wholly abroad. This would include, for example,  a foreign branch. Such a trade is subject to a different categorisation under the Income Tax Act. Losses may be set off against that trade only and brought forward.

The loss (12.5% rate)must first be used against trading profits in the current period before it can be set off against prior periods.It must be used to reduce trading profits in the current or prior period before being used against other income on a proportionate (effectively half allowed)basis.

Where the loss is carried back and there is a change in tax rate, the loss is restricted to the rate applicable to the loss in the year that it arises. It is not allowed at the rate applicable in previous year or years in respect of which the loss is used.  The carry back may generate a repayment or adjustment. Interest would not be allowed.

Finance Act 2023 amends the provisions that  pre-trading expenditure is not treated as incurred, on commencement of a trade or profession, for the purposes of calculating a loss for set off against other income. The amendment clarifies that the restriction also applies when calculating losses which may be set off in accordance with other provisions which relate to the set off of losses against other income taxable at the corporation tax rate of 12.5 per cent, on a value basis or which could be surrendered as group relief. The amendment  applies to accounting periods commencing on or after 1 January 2024.

Carry Forward

Losses that have not been so used by carry back, may be carried forward against trading income of the same trade for which the loss was incurred.  The loss can be carried forward indefinitely against that same trade provided the company continues to exercise the same trade. Unlike the use of the loss in the current or previous year, the loss in this context may not be used against all income [and gains].

What constitutes the same trade may be a question of interpretation in some cases. This is ultimately a matter of  interpretation of the particular facts. If a trade is wholly discontinued (as opposed to temporarily suspended) and restarted there is a new trade. In this event the losses of the previous trade may not be set against those of the new trade, notwithstanding that it is identical in nature to the old trade.

A loss brought forward must be set against the first income available for the same trade. They cannot be spared and used piecemeal  and must be used in earlier (post loss) periods in priority to later periods.

Losses & Charges

Losses are not to be carried forward to the extent of the amount to which they would have been used if the company had non-trade charges available against profit.   In effect the loss carried forward must be net of the amount of the loss of that would have been available but for the availability of non-trade charges.

See other sections on the notion of “charges” against profits in tax computation. They are certain types of prior payment obligations and are treated differently to other expenditure and expenses.

The Tax Acts distinguish trading charges and non-trading charges. The latter is one incurred wholly or exclusively for the purpose of the trade.  A non-trading charge covers certain types of expenditure, such as interest on money borrowed for non-trade purposes, for example, to invest in a subsidiary for example.

Claiming Losses

A company has the option to use  losses in a number of different ways. A claim must be made in order to set off against all income of the current period and previous period (provided that the same trade was being carried on). A claim may be made in respect of part of the losses. It need  not necessary be for the maximum amount in respect of current year and previous year.

The claim may be made to set  the loss against the same trade in the current and / or the previous year or against all income of the  current and previous year.  The claim for offset in respect of all income (not just the trading income) for the current and previous year, will only apply where maximum relief has already been claimed in respect of the trade for which the loss was incurred.

After the above claim, the  excess(unclaimed losses)  are then available as a credit against future corporation tax on the same trade. The carrying forward of losses is not contingent on maximum claims being made on either of the above basis.  No specific claim need be made.  There is a tax cash flow advantage to making the claim in respect of the earlier period.

The time for making the above claims to use losses against all types of current and prior year income is two years from the end of the accounting period in which the loss was sustained. Losses forward can continue indefinitely until exhausted.

Restriction of losses

Pre-trading expenditure and charges which are wholly and exclusively referrable to the trade, incurred prior to commencement, cannot be offset against total profits.

Some categories of losses are restricted for policy reasons. In some cases the restriction dates back to targeted legislation seeking to end a perceived abuse or inappropriate allowance of relief.

Capital allowances which create losses in relation to lease machinery are offset will only against income from the leasing trade.

Allowances from a limited partnership trade are available only against the partner concerned’s share of income from that trade.

Terminal losses

Terminal losses are those arising in the final 12 months before cessation of the trade. They can be carried backwards to the preceding three years ,effectively allowing for reclaim. This may be done only once for the last reliefs that could be claimed have been used.

The 12 months will often straddle two accounting periods so that losses must be apportioned. If there is a profit in the penultimate period the loss will be nil.When the earlier periods of account are different in length, an apportionment is required.