ACCA F6 FA09 Study Text 2010

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Chapter 19: Company trading losses

3.4 Terminal loss relief

When a company ceases to trade, it will have no future trading profits. If it has

trading losses it can only claim s393A relief. However, s393A relief on the cessation

of trade is more generous than normal ongoing trading loss relief.

When a loss-making company ceases to trade, it must first claim s393A in the

normal way in the current loss-making period before considering a carry-back

claim.

The carry-back claim is then dealt with in the same way as normal ongoing losses

except that trading losses of the last 12 months of trading can be carried back

three years before the start of the CAP in which the loss was incurred.

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

Rule: Explanation

Trading losses of

the last 12 months

trading may be

carried back

All the trading losses incurred in the 12 months before the

date of cessation of business may be carried back.

The last 12 months of trading may span two CAPs.

If so, trading losses eligible for the relief must be calculated

in two parts:

 the last CAP, and

 a part of the previous CAP.

The trading losses of the previous (penultimate) CAP must

be time-apportioned to calculate the amount falling into the

last 12 months of trading.

These trading

losses can be

carried back three

years from the start

of the CAP in

which the loss was

incurred

Trading losses can be carried back exactly 36 months from

the start of the loss-making CAP, but no more than 36

months, on a LIFO basis.

The carry-back could affect more than three CAPs if the

company changed its accounting date in the three-year

carry-back period.

If so, the total profits of the earliest CAP must be time-

apportioned to calculate the total profits eligible for relief

(i.e the profits that fall into the 36-month carry-back period).

The rules for the relief of a terminal loss are very similar to those for the extended

carry back relief. However, there is no restriction on the amount of loss that can be

carried back to the earliest two accounting periods. Anti-avoidance rules therefore

deny terminal loss relief where the cessation of trade results from the transfer of

trading activities to a person who is not chargeable to corporation tax and the main

purpose of this arrangement is to gain access to terminal loss relief.

Paper F6 (UK): Taxation FA2009

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Example

V plc ceased to trade on 31 December 2009 and in its last 12 months of trading it

incurred a trading loss of £278,500. In this last year it had no other income or gains

and made no Gift Aid donations. It has supplied the following information in

respect of the preceding CAPs:

y/e 31

May

2006

7 months

ended 31

December

2006

y/e 31

December

2007

y/e 31

December

2008

£ £ £ £

Trading profit / (loss) 121,000 47,000 67,000 23,000

Interest income

12,000 7,000 12,000 12,000

Chargeable gains

Nil Nil 12,000 48,500

Gift Aid donation

(600) Nil (600) (600)

Required

(a) Calculate the PCTCT for each CAP, assuming losses are relieved as soon as

possible.

(b) Explain how your answer would have differed had V plc not ceased trading.

Answer

(a) (Note that in this example, the final 12 months of trading coincide with the final

12-month CAP.)

V plc

Corporation tax

y/e 31 May

2006

7 m/e 31

December

2006

y/e 31

December

2007

y/e 31

December

2008

£ £ £ £

Trading income 121,000 47,000 67,000 23,000

Minus: s393 (1) trading losses

Nil Nil Nil Nil

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

121,000 47,000 67,000 23,000

Interest income

12,000 7,000 12,000 12,000

Net chargeable gains

0 0 12,000 48,500

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

133,000 54,000 91,000 83,500

Minus: s393A claim

Current period claim:

- y/e 31.12.09 = £Nil

Carry back 36 months:

- y/e 31.12.08

(83,500)

- y/e 31.12.07

(91,000)

- 7 months ended 31.12.06

(54,000)

- 5 months of y/e 31.5.06:

maximum(£133,000×5/12)

=£55,417‐(alsosee working)

(50,000)

–

–––––

–

––––––––––––

–

–––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

83,000 Nil Nil Nil

Chapter 19: Company trading losses

V plc

Corporation tax

y/e 31 May

2006

7 m/e 31

December

2006

y/e 31

December

2007

y/e 31

December

2008

Minus: Gift Aid

(600) Nil lost lost

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

PCTCT 82,400 Nil Nil Nil

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

Working

Record of trading losses

y/e 31

December

2009

Trading loss in final CAP/12 months of trading 278,500

Set off under s393A:

In the loss-making CAP

(0)

Carry back 36 months:

- y/e 31.12.08

(83,500)

- y/e 31.12.07

(91,000)

- 7 months ended 31.12.06

(54,000)

- 5 months of y/e 31.5.06: Maximum relief = £133,000 × 5/12 = £55,417

(50,000)

–––––––––––––––––––––––––––––––––

–

Trading loss remaining unrelieved 0

–––––––––––––––––––––––––––––––––

–

(b) If V plc had continued trading, relief would have been restricted to the normal s393A

and the extended carry back. This would have resulted in the following amount of loss

being carried forward under s393(1):

V plc

Corporation tax

y/e 31 May

2006

7 m/e 31

December

2006

y/e 31

December

2007

y/e 31

December

2008

£ £ £ £

Trading income 121,000 47,000 67,000 23,000

Minus: s393 (1) trading losses

Nil Nil Nil Nil

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––

–

–––

–

121,000 47,000 67,000 23,000

Interest income

12,000 7,000 12,000 12,000

Net chargeable gains

0 0 12,000 48,500

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––––

––––––––––––––––––––––––

–

––––––––

–

133,000 54,000 91,000 83,500

Minus: s393A claim

Current period claim:

- y/e 31.12.09 = £Nil

Carry back 36 months:

- y/e 31.12.08

(83,500)

Extended carry back (max)

(50,000)

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

133,000 54,000 41,000 Nil

Minus: Gift Aid

(600) Nil (600) lost

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

PCTCT 132,400 54,000 40,400 Nil

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

Paper F6 (UK): Taxation FA2009

348 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

Working

Record of trading losses

y/e 31

December

2009

Trading loss in y/e 31.12.09 278,500

Set off under s393A:

In the loss-making CAP

(0)

Carry back 12 months:

- y/e 31.12.08

(83,500)

Extended carry back to y/e 31.12.07 (maximum)

(50,000)

–––––––––––––––––

–

–––––––––––––––

–

Trading loss carried forward under s393(1) 145,000

–––––––––––––––––––––––––––––––––

–

Chapter 19: Company trading losses

Tax planning

 Choosing the optimum loss relief

 The rates of corporation tax savings

 Reduced capital allowances claim

4 Tax planning

4.1 Choosing the optimum loss relief

The primary aim of a company when using trading losses should be to save the

maximum amount of corporation tax.

The rates of corporation tax applicable in each CAP, including the projected future

rates of tax applicable, are therefore a key factor in deciding the optimum loss relief

claim.

Cash flow is another important consideration, particularly if the company has a

cash flow problem. Shortage of cash may force the company to claim relief as soon

as possible (i.e. claim loss relief against the current CAP and then make a carry-back

claim) even though it may achieve a higher rate saving by carrying the loss forward.

This is because a carry-back claim will result in a repayment of corporation tax that

the company has previously paid, and may possibly also carry interest (i.e. a

repayment supplement).

The wastage/loss of relief for Gift Aid donations is not desirable and is another

consideration to bear in mind. However, this is unlikely to be key deciding factor.

4.2 The rates of corporation tax savings

To achieve the highest tax savings, the company will want to utilise the loss in CAPs

when it is paying the highest marginal rate of tax. It is therefore necessary to

compare the profits of the appropriate CAPs with the statutory limits to decide the

rate of tax applicable.

The marginal rates of corporation tax are as follows:

Profits for a 12 month period

assuming no associated companies

Effective marginal

rate of tax

FY07

FY08

FY09

£0 - £300,000 20%

21%

£300,000 - £1,500,000 32½%

29¾%

£1,500,000 + 30%

28%

Paper F6 (UK): Taxation FA2009

350 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

Althoughthe rates havechanged over thelast three  years,thekeypoint to bearin

mind is that the highest rate of tax saving is achieved by setting the loss against

profitsfallinginthemarginalband.

Explanation of the effective marginal rate of tax

In the marginal banding £300,000 – £1,500,000, the effective rate of tax for FY09 is

29¾% calculated as follows:

Profits Tax rate Tax

Explanation

300,000 21% 63,000

= Tax if profits are exactly £300,000

1,500,000 28% 420,000

= Tax if profits are exactly £1,500,000

1,200,000

357,000

= Effective marginal rate of tax 29¾%

In the marginal band £300,000 to £1,500,000, £357,000 tax must be collected from

£1,200,000 profits. The effective marginal rate of tax is therefore 29¾% (£357,000 ÷

£1,200,000 expressed as a percentage).

If there is no FII, it is possible to calculate the corporation tax liability of a company

by working up through the bandings and taxing the PCTCT at the effective

marginal rate.

However, where there is FII, this method will not give the correct answer. Although

the true effective rate in the marginal band will certainly be more than 28%, it will

not be exactly 29¾%. This is because the correct corporation tax liability of a

company in the £300,000 – £1,500,000 banding is:

PCTCT × Full rate of tax minus Marginal relief formula (which includes FII).

In an examination question on losses, the effective marginal rates of tax in the table

above can be used to determine the appropriate tax savings achieved in the

utilisation of losses.

Example

W 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) 558,500 (214,000) 265,000

UK Property income

14,000 9,000 16,000

Net chargeable gains

130,000 Nil 13,500

Gift Aid donation

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

Chapter 19: Company trading losses

Required

Calculate the PCTCT for each year assuming losses are relieved in the most tax

efficient manner, and calculate the tax saving achieved.

Answer

W Ltd: Corporation tax computations - without loss relief

Year ended 31 March

2008 2009 2010

£ £ £

Trading income 558,500 Nil 265,000

UK property income 14,000 9,000 16,000

Net chargeable gains 130,000 Nil 13,500

–

––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

702,500 9,000 294,500

Minus: Gift Aid (1,000) (1,000) (1,000)

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

PCTCT before considering loss relief 701,500 8,000 293,500

–

–––––

–

––––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

Tax saving: Tax would be saved at the following rates if the losses were deducted in

the periods indicated:

Loss-making period (y/e 31.3.09)

21%

Preceding 12 months (y/e 31.3.08) 32½%

Following CAP (y/e 31.03.10)

21%

W Ltd would prefer to avoid making a claim in y/e 31.03.09 as it would utilise

£9,000 of the loss, waste £1,000 of Gift Aid relief, and save tax at only 21%. However,

it would probably be prepared to do so in order to bring back the relief to the y/e

31.3.08 where it will save tax at the highest marginal rate. It cannot carry back losses

unless it has first made a current period claim.

Amount

of loss

used

Rate of

saving

Tax

saving

£ %

Current loss-making period claim 9,000 21

(note)

1,680

Carry back claim

205,000 32½

66,625

214,000

68,305

This method also has the advantage of relieving losses as soon as possible.

If the loss were carried forward to y/e 31.3.10, the tax saving would be £44,940 (=

£214,000 × 21%).

Paper F6 (UK): Taxation FA2009

Note:

The tax saving in the current period will only be £1,680 (£8,000 × 21%) as the

company has PCTCT of £8,000. However, as the loss must be set off before the

deduction of the Gift Aid payments, £9,000 of the loss must be used to achieve this

tax saving.

Year ended 31 March 2008 2009 2010

£ £ £

Trading income 558,500 Nil 265,000

Minus: s393 (1) trading losses b/f Nil Nil (Nil)

–

–––––

–

––––––––––––––––––––––––––

–

––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

558,500 Nil 265,000

UK property income 14,000 9,000 16,000

Net chargeable gains 130,000 Nil 13,500

–

–––––

–

––––––––––––––

–

–––––––––––

–

––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

702,500 9,000 294,500

Minus: s393A claim

- current loss making CAP

(9,000)

- carry back to previous 12 months (205,000)

–

–––––

–

––––––––––––––––––––––––––

–

––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

497,500 Nil 294,500

Minus: Gift Aid (1,000) lost (1,000)

–

–––––

–

––––––––––––––––––––––––––

–

––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

PCTCT 496,500 Nil 293,500

–

–––––

–

––––––––––––––––––––––––––

–

––––––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

Working: Record of trading losses

Trading loss in CAP

214,000

Set off under s393A:

- in loss making CAP

(9,000)

- in carry back CAP

(205,000)

–

––––––––––––––––––––––––––––––––––

Trading loss c/f under s393(1)

Nil

–

––––––––––––––––––––––––––––––––––

4.3 Reduced capital allowances claim

Loss relief under s393A is an all or nothing relief; if claimed, a company must set off

the maximum amount possible. Making a claim under s393A may save some tax at

29¾%, but losses may first have to be matched against profits taxed at 21%.

S393A requires the whole of the trading loss to be relieved (i.e. the adjusted loss

including capital allowances). However, a company does not have to claim all its

capital allowances. It can claim any amount up to the maximum capital allowances

available. Therefore, it may sometimes be advantageous to reduce a trading loss by

not claiming all of the capital allowances available.

If a reduced capital allowances claim is made, the actual allowances claimed are

deducted from the appropriate columns in the capital allowances computation. The

TWDVs carried forward will therefore be higher, resulting in higher capital

allowances available in the future.

Chapter 19: Company trading losses

Note, however, that in the examination you should always calculate the maximum

capital allowances available, unless the question tells you to do otherwise.

Paper F6 (UK): Taxation FA2009