ACCA F6 FA09 Study Text 2010

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Chapter 19: Company trading losses

The carry forward of trading losses

 Carrying forward trading losses: s393(1) ICTA 1988

 The rules of s393(1) ICTA 1988

2 The carry forward of trading losses

2.1 Carrying forward trading losses: s393(1) ICTA 1988

The rules for carrying forward trading losses are contained in section 393(1) of the

Income and Corporation Taxes Act 1988. This is abbreviated to s393(1) ICTA 1988.

Knowledge of section numbers is not required or even expected in answers to

examination questions. Candidates will not even be penalised for quoting a section

number incorrectly in their answer.

However, section numbers serve as useful abbreviations in a corporation tax loss

computation, and are a way of identifying the particular tax rules. Section numbers

are therefore used in this part of the text.

2.2 The rules of s393(1) ICTA 1988

Trading losses can be carried forward and set off against the first available profits in

the future from the trade that produced the loss. There is no time limit for carrying

these losses forward to future CAPs.

These rules are explained in some further detail in the table below.

Trading loss must

be set off against:

Explanation

 the first available  The trading loss must be set off in the next CAP if

possible.

 A company cannot choose to miss out a CAP, for

example to obtain a better rate of tax relief in a later

CAP.

 trading profits  The set-off is against trading income assessments only.

 Trading losses carried forward cannot be set off against

other sources of income and gains.

 of the trade that

produced the loss

 If a company operates more than one type of trading

activity, trading losses carried forward can only be set

off against future profits from the activity that produced

the loss. They cannot be set off against profits of a

different trading activity.

 as much as

possible

 In each future CAP, the maximum amount of trading

loss must be set off until relief has been given for the

total trading loss.

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Trading loss must

be set off against:

Explanation

 The effect of this is that the loss to be relieved in any

CAP is the lower of:

- the loss available, or

- the trading profit of the CAP.

Trading losses will be carried forward automatically and relieved in this way if the

company does not claim relief against total profits under s393A ICTA. (This

alternative option is explained later.)

Example

S Ltd prepares its accounts to 31 March each year and has supplied the following

information:

Year ended 31 March 2008 2009 2010

£ £ £

Trading profit / (loss) (125,000) 28,000 803,500

Interest income

20,000 20,000 20,000

Net chargeable gains

Nil 135,000 Nil

There were no unrelieved trading losses at 1 April 2007.

Required

(a) Calculate the PCTCT for each year, assuming losses are carried forward.

(b) Calculate the loss that is unrelieved, if any, at 31 March 2010.

Answer

(a) S Ltd: Corporation tax computations

Year ended 31 March

2008 2009 2010

£ £ £

Trading income 0 28,000 803,500

Minus s393 (1) trading losses b/f (see working)

0

(28,000) (97,000)

–

–––––

–

––––––––––––––––––––––– –––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

0

0 706,500

Interest income

20,000

20,000 20,000

Net chargeable gains

0

135,000 0

–

–––––

–

––––––––––––––––––––––– –––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

PCTCT

20,000

155,000 726,500

–

––––

–

––––––––––––––––––––––– –––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––



(b)

Record of trading losses



Trading loss b/f

125,000 97,000

Set off under s393(1)

(28,000) (97,000)

–––––––––––––––––––––––––––––––––

Trading loss c/f under s393(1)

97,000 0

–––––––––––––––––––––––––––––––––

Chapter 19: Company trading losses

Relief for trading losses against total profits

 Claiming relief for losses against total profits under s393A ICTA 1988

 Proforma corporation tax loss relief computation

 The temporary extension of relief

 The effect of a short CAP in the carry back period

 Terminal loss relief

3 Relief for trading losses against total profits

3.1 Claiming relief for losses against total profits under s393A ICTA 1988

Instead of carrying forward its trading losses, a company may choose to claim relief

for the losses against total profits under section 393A ICTA 1988:

 in the loss-making CAP only (i.e. make a claim for the current period), or

 in the loss-making CAP first, and then carry back the unrelieved loss to the

previous 12 months (i.e. make a current year and carry back claim).

A carry back claim cannot be made unless the current loss making period is

relieved first.

When setting off the trading loss under s393A, the following rules apply:

 A claim for loss relief under s393A is optional.

 If relief is claimed, the trading loss is set off against total profits in the current

CAP as much as possible. Any loss that cannot be relieved against total profits in

the current CAP may be carried back another 12 months.

 Any trading losses left unrelieved are automatically carried forward and set

off under the rules of s393(1).

 The claim must be made within two years of the end of the loss making CAP.

These rules are explained in some further detail in the table below.

Rule: Explanation

 Set off against total

profits

 Total profits are all other income plus net

chargeable gains, but before deducting Gift Aid

payments.

 Must set off as much as

possible in the CAP

 The claim is optional. However if the claim is

made, the maximum amount of trading loss must

be deducted from total profits of the CAP.

 The loss relief may reduce the total profits to nil, so

that relief for Gift Aid payments is lost. (The Gift

Aid payments cannot be carried forward, or carried

back; they are wasted/lost.)

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3.2 Proforma corporation tax loss relief computation

The following proforma should be used to set out computations to calculate trading

loss relief. In this proforma, it is assumed that a trading loss occurs in CAP 2.

Name of company:

Corporation tax computations

CAP 1 CAP 2 CAP 3

£ £ £

Trading income X Nil X

Minus: s393 (1) trading losses b/f

- - (X)

–

–––––

–

––––––––––

–––––––––––––––––

X Nil X

Other income X X X

Net chargeable gains X X X

–

–––––

–

––––––––––

–––––––––––––––––

X X X

Minus: s393A claim

- current loss making CAP

(X)

- carry back to previous 12 months (X)

–

–––––

–

––––––––––

–––––––––––––––––

X Nil X

Minus: - Gift Aid (X) lost (X)

–

–––––

–

––––––––––

–––––––––––––––––

PCTCT X X X

–

–––––

–

––––––––––

–––––––––––––––––

Working

Record of trading losses

Trading loss b/f

Set off under s393(1)

(X)

Trading loss in CAP 2

Set off under s393A:

- in loss-making CAP

(X)

- in carry back CAP

(X)

–––––––––––––––––

Trading loss c/f under s393(1)

X X

–––––––––––––––––

Example

T Ltd prepares its accounts to 31 August each year and has supplied the following

information:

Year ended 31 August

2008 2009 2010

£ £ £

Trading profit / (loss) 58,500 (323,000) 164,250

UK property income

14,000 15,000 16,000

Net chargeable gains / (loss)

(5,000) 45,000 0

Gift Aid donation

(1,000) (1,000) (1,000)

Required

Calculate the PCTCT for each year assuming losses are relieved under s393A.

Chapter 19: Company trading losses

Answer

T Ltd: Corporation tax computations

Year ended 31 August 2008 2009 2010

£ £ £

Trading income 58,500 0 164,250

Minus: s393 (1) trading losses b/f

0 0 (164,250)

–

–––––

–

––––––––––––––––––––––––––

–

–––––––––––––––––––––––––––––––––––

––––––––––––––––––––––

–

––––––––––

–

58,500 0 0

UK property income

14,000 15,000 16,000

Net chargeable gains (see note 1)

0 40,000 0

–

–––––

–

––––––––––––––––––––––––––

–

–––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

Total profits 72,500 55,000 16,000

Minus

s393A claim

- current loss making CAP

(55,000)

- carry back to previous 12 months

(72,500)

–

–––––

–

––––––––––––––––––––––––––

–

–––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

0 0 16,000

Minus

Gift Aid (see note 2) lost lost (1,000)

–

–––––

–

––––––––––––––––––––––––––

–

–––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

PCTCT 0 0 15,000

–

–––––

–

––––––––––––––––––––––––––

–

–––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––

–

–––––

–

Working

Record of trading losses

£ £

Trading loss b/f

195,500

Set off under s393(1)

(164,250)

Trading loss in CAP

323,000

Set off under s393A

- in loss-making CAP

(55,000)

- in carry-back CAP

(72,500)

–––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

Trading loss c/f under s393(1)

195,500 31,250

–––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

Notes

(1) Capital losses must be carried forward and set against the first available

future chargeable gains. They cannot be set against other profits in the CAP.

Net chargeable gains in the year to 31 August 2009 are therefore £45,000 -

£5,000 loss brought forward = £40,000.

(2) If as a result of loss relief there are no profits against which to set off Gift Aid

donations, the benefit of Gift Aid is lost.

3.3 The temporary extension of relief

Finance Act 2009 has introduced a temporary extension to the trading loss rules.

Losses incurred in CAPs ending between 24 November 2008 and 23 November 2010

can be carried back against total profits generated in the 36 months before the start

of the loss-making CAP. The carry back is on a last-in-first-out (LIFO) basis.

The extended loss relief is restricted to a maximum of £50,000.

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Where the CAP in which the loss is incurred is less than 12 months, the £50,000 limit

is apportioned.

A claim for the extended carry back must be made within two years of the end of

the loss making accounting period.

These rules are explained in further detail in the table below.

Rule: Explanation:

Losses incurred in CAPs

ending between 24

November 2008 and 23

November 2010

Set off against total profits.

Relief on LIFO basis

 The extended loss relief depends on the date on

which the loss making accounting period ends.

 Before the extended relief may be claimed a normal

s393A claim must be made against total profits of

the current year and the 12 months prior to the

current year.

 The set off is against profits of the most recent years

first.

Must set off as much as

possible in the tax year

Relief restricted to £50,000

 It is an all or nothing relief.

 The claim is optional. However, if the claim is

made, the maximum amount must be deducted

from the total profits.

 The restriction applies only to the two earliest years

of set off.

 The additional relief for those two tax years is

limited to a total of £50,000.

 The £50,000 limit is apportioned if the loss making

accounting period is less than 12 months long.

Example

T Ltd prepares its accounts to 31 August each year and has supplied the following

information:

Chapter 19: Company trading losses

Year ended

31 August

2006 2007 2008 2009 2010

£ £ £ £ £

Trading profit / (loss) 18,000 20,000 58,500 (323,000) 164,250

UK property income

12,000 13,000 14,000 15,000 16,000

Net chargeable gains

/ (loss)

0 0 (5,000) 45,000 0

Gift Aid donation

(1,000) (1,000)

(1,000) (1,000) (1,000)

Required

(a) Calculate the PCTCT for each year assuming losses are relieved using the

extended carry back rules.

(b) Calculate the loss available to carry forward, if any, at 31 August 2010.

Answer

(a)

T Ltd: Corporation tax computations

Year ended 31 August 2006 2007 2008 2009 2010

£ £ £ £ £

Trading income 18,000 20,000 58,500 0 164,250

Minus: s393 (1)

0 0 0 0 (145,500)

–

––––

–

–––––––––

–

––––––––––––––––

–

––––

–

––––––––––––––––––––––––––

–

––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

18,000 20,000 58,500 0 18,750

UK property income

12,000 13,000 14,000 15,000 16,000

Net chargeable gains

0 0 0 40,000 0

–

––––

–

––––––––––––––––––––––––––

–

––––

–

––––––––––––––––––––––––––

–

––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

Total profits 30,000 33,000 72,500 55,000 34,750

Minus

s393A claim

- current loss making CAP

(55,000)

- carry back to previous 12 months

(72,500)

- extended carry back claim (17,000)

(33,000)

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

13,000 0 0 0 34,750

Minus

(1,000)

lost lost lost (1,000)

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

PCTCT 12,000 0 0 0 33,750

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

Working

(b) Record of trading losses

£ £

Trading loss b/f

145,500

Set off under s393(1)

(145,500)

Set off under s393A

323,000

- in loss-making CAP

(55,000)

- in carry-back CAP

(72,500)

- extended carry back to 2007

(33,000)

- extended carry back to 2006 (note)

(17,000)

–––––––––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

Trading loss c/f under s393(1)

145,500 Nil

–––––––––––––––––––––––––––––––––

––

–

–––––

–

––––––––––––––––––––––––––

–

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Notes

(1) The extended loss relief is available because the loss making accounting

period ends on 31 August 2009, which is in the period 24 November 2008 to 23

November 2010.

(2) A normal claim under s393A must be made against total profits of the year of

the loss and the 12 months prior to the start of the loss making accounting

period.

(3) The extended loss relief is then available for the years ended 2007 and 2006.

However, the loss available for relief in these two years is restricted to a

maximum of £50,000 in total.

3.4 The effect of a short CAP in the carry back period

Under the rules of s393A, trading losses can be carried back against total profits

generated in the 12 months before the start of the loss-making CAP.

This usually means carrying back the loss into the immediately-preceding CAP.

However, if the company changed its accounting date in the 12-month carry back

period, two CAPs will fall in the 12-month carry back period.

If this is the case, the following rules apply:

 Losses carried back should be set off against total profits on a last-in first-out

(LIFO) basis.

 The losses can be carried back against total profits in the previous 12 months.

 The losses must be carried back for the full 12-month period.

 The length of the loss-making CAP does not affect how far it can be carried back.

These rules are explained in further detail in the table below.

Rule: Explanation

Set off the losses on

a LIFO basis

The trading loss is carried back on a last-in-first-out basis,

in reverse date order. The loss is set off against total profits

in the previous CAP first, and then the CAP before that.

Can only carry back

against the profits of

the previous 12

months

Trading losses can be carried back exactly 12 months from

the start of the loss-making CAP, but no more than 12

months.

Therefore, the total profits of the earliest CAP must be

time-apportioned to calculate the total profits eligible for

relief.

Must carry back loss

for the whole 12

month carry back

period

The losses must be set off as much as possible in both

CAPs that fall into the 12 month carry back period (on a

LIFO basis).

A company cannot decide to claim relief in only one of the

carry back CAPs.

Chapter 19: Company trading losses

Rule: Explanation

The length of the

loss making period

does not affect how

far the loss can be

carried back

Regardless of the length of the loss-making CAP itself,

trading losses can be carried back exactly 12 months from

the start of the loss-making CAP.

For example, trading losses incurred in the 7 month CAP

to 31 March 2010 can be carried back to 1 September 2008

(i.e. 12 months before the start of the 7-month CAP).

These rules also apply to the temporary extension to the carry back rules and to

terminal losses (see next section). However, as regards the extended carry back, the

length of the loss making accounting period does affect the computation of the

maximum £50,000 carry back.

Example

U Ltd prepared its accounts to 30 September until 2007 when it changed its

accounting date to 31 December by preparing a three month set of accounts. U Ltd

has supplied the following information:

y/e 30

September

2007

3 months

ended 31

December

2007

y/e 31

December

2008

y/e 31

December

2009

£ £ £ £

Trading profit / (loss) 321,000 60,000 (457,000) 123,000

Property income

6,000 6,000 6,000 6,000

Net chargeable gains / (loss)

Nil (14,000) 26,000 48,500

Gift Aid donation

(1,500) Nil (1,500) (1,500)

Required

Calculate the PCTCT for each CAP assuming losses are relieved as soon as possible.

Answer

U Ltd:

Corporation tax

y/e 30

September

2007

3 months

ended 31

December

2007

y/e 31

December

2008

y/e 31

December

2009

£ £ £ £

Trading income 321,000 60,000 Nil 123,000

Minus: s393 (1) trading losses

b/f – see working

Nil Nil Nil

(

77,750)

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

321,000 60,000 Nil 45,250

Property income 6,000 6,000 6,000 6,000

Net chargeable gains (see note 1)

Nil Nil 12,000 48,500

–

–––––

–

––––––––––

–

–––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

Total profits 327,000 66,000 18,000 99,750

Minus s393A claim

Paper F6 (UK): Taxation FA2009

U Ltd:

Corporation tax

y/e 30

September

2007

3 months

ended 31

December

2007

y/e 31

December

2008

y/e 31

December

2009

Current period claim - y/e 31.12.08

(18,000)

Carry back 12 months:

- 3 months to 31.12.07

(66,000)

- 9 months of y/e 30.9.07

(£327,000 × 9/12)

(245,250)

Extended carry back (max) (50,000)

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

31,750 Nil Nil 99,750

Minus Gift Aid (1,500) Nil lost (1,500)

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

PCTCT 30,250 Nil Nil 98,250

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

Working

Record of trading losses

y/e

31 December

2008

y/e

31 December

2009

£ £

Trading loss b/f

77,750

Set off under s393(1)

(77,750)

Trading loss in CAP

457,000

Set off under s393A

- in loss making CAP (18,000)

Carry back 12 months:

- 3 m/e 31.12.07 (66,000)

- 9 months of y/e 30.9.07 (£327,000 × 9/12)

(245,250)

Extended carry back (maximum) (50,000)

–

–––––

–

––––––––––––––––––––––––––

–

–––––––––––––––––––––––––––––––––

–

Trading loss c/f 77,750 Nil

–

–––––

–

––––––––––––––––––––––––––

–

–––––––––––––––––––––––––––––––––

–

Note

(1) Capital losses must be carried forward and set against the first available

future chargeable gains. They cannot be set against other profits in the CAP.

Net chargeable gains in the year to 31 December 2008 are therefore £26,000 -

£14,000 loss brought forward = £12,000.

(2) The extended carry back applies because the loss making accounting period

ends on 31 December 2008, which is in the period 24 November 2008 to 23

November 2010.

(3) As the loss making accounting period covers a full 12 months, a maximum of

£50,000 can be carried back under the extended carry back rules. As the whole

of this £50,000 can be set off during the year ended 30 September 2007, the loss

cannot be carried back any further.