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Corporation tax: carry forward or carry back your losses?

If your business makes a loss for tax purposes, that might sound like bad news. But the reality is that you can turn this loss to your advantage, with the right tax planning.

In many circumstances, your loss can be offset against other taxable income. This means you can reduce your payable tax, or even get a refund on the tax you’ve already paid. Not a bad outcome – and something that could be a significant financial boost for your company. So, what can you do to offset this loss?

What are the main types of losses?

A company’s sources of income and expenses are treated differently depending on a number of factors. But for many companies, the main area to consider is the company’s trading losses.

What exactly are trading losses?

Your business might carry out an activity with a reasonable expectation of profit, but incur a loss in some years. You thought you’d make a profit trading in this way, but the actual outcome was a loss. This is your trading loss

Separate from trading losses, there are other types of loss that you may incur:

  • Your business may incur losses in a property income business. Broadly speaking, this usually comes from property rentals.
  • Losses from overseas activities are considered separately.
  • Miscellaneous income is a ‘sweep up’ provision to cover most transactions which would not be caught under the normal tax provisions. It still leaves out some items such as gambling and voluntary gifts.
  • The last ‘bucket’ is for the cost of charitable donations.

How are these losses treated for tax?

Losses you incur from different areas will be treated in different ways. Knowing the various tax treatments helps you and your advisers to maximise the potential end benefits of claiming these losses with HM Revenue & Customs (HMRC)

UK trading losses:

Any UK trading losses you’ve incurred must be offset against profits from any other sources in the same year. So, for example, if there was a trading loss and a property income profit, then the trading loss should be offset as much as possible against that profit.

Where this ‘sideways relief’ is not available or is exhausted, remaining losses can either be:

  • Carried back against the previous year’s total profits (three years for losses made in years ending between 1 April 2020 and 31 March 2022) or,
  • Carried forward to offset against total profits, provided that the trading business existed/continues to exist.
  • UK property income losses:

Where possible, any UK property income losses you incur should be offset against profits from other sources in the same year. Any surplus can be carried forward and will be available for offset against any profits, so long as the property business continues.

NOTE: losses from furnished holiday letting can only be carried forward, and can only be offset against future profits of the same business.

Overseas trading:

Losses from overseas trades can only be carried forward, and can only be relieved against future profits from those overseas trades.

Miscellaneous items:

Losses from miscellaneous items can be offset against profits from other miscellaneous items in the same year. Otherwise, they can be carried forward to offset against any future such profits.

Charitable donations:

It could be that your charitable donations are more than the company’s pre-donation profit. The maximum deduction in the year is capped at an amount which will reduce overall profits to zero. Any excess donations will not be available to carry forward or backwards.

Terminal Loss Relief:

The final way in which losses can be relieved is Terminal Loss Relief. If your business ceases trading completely, you can claim for losses incurred in this final period. Losses in the twelve months to cessation can be carried back to accounting periods ending within three years preceding the accounting period in which the loss is incurred.

Talk to us about utilising your tax losses

If your business incurs a tax loss, it’s important to deal with this loss in the correct way – so you can claim the appropriate corporation tax relief. The rules are complex and our summary doesn’t capture every specific circumstance that could apply.

We can help you with the various claims that need to be made. We can also advise you on circumstances where it may be better to carry forward losses rather than getting earlier relief.

Talk to us about the best way to handle any losses your company has incurred.