If your company or business makes a loss from trading, the sale or other disposal of a capital asset, or on income from property, and it is liable to pay Corporation Tax, relief for corporation tax losses may be available.
Tax relief for corporation tax losses is obtained by offsetting the loss against other profits or gains from your business within the same accounting period. The loss may also be carried back, or if you decide not to do so, carried forward to another accounting period.
A trading profit or loss is calculated by making tax adjustments to the amount of profit or loss, as shown in the company’s financial accounts. To work out a trading loss, you must:
- Include any capital allowances (these will increase the loss)
- Include any balancing charges (these will reduce the loss)
- Not include any gains or losses that may be made on the disposal or sale of business assets
- Include certain charitable donations and annuities (otherwise known as ‘trade charges’)
How to claim a trading loss
Claiming for trading losses forms part of the company’s tax return. If the claim for relief covers the latest accounting period, you should enter ‘0’ in box 155 on form CT600 and put the actual amount of the loss in box 780. The form will also ask you to enter the complete loss, or as much as you can claim for the loss, in box 275 against your total profits.
If your claim includes losses from a later accounting period, you must:
- Enter ‘0’ in box 155 on form CT600
- Enter the total figure of the trading losses accruing either in this, or a later accounting period, that can be claimed against the full amount of profits in box 275
- Write the amount of the loss accruing in this accounting period in box 780 only
If your company is part of a group of companies, you may be able to offset certain losses. This includes losses from trading, against profits of other companies in the group, instead of carrying it backwards or forward.
Carrying forward a trading loss
A company can carry forward a trading loss, which enables it to deduct profits from future accounting periods providing trade continues. Losses after 1st April 2017 can usually be used against a company’s total profits.
Carrying forward a capital loss
Should a company have capital losses that have not been used against capital gains during the same accounting period, they can be carried forward and deducted from later capital gains. These losses can only be set against later capital gains. However, there are restrictions, and when a company joins another group, for example, using carried forward capital losses may not be allowed.
Restrictions on relief for carrying forward losses
For profits arising from 1st April 2017, there are restrictions on the amount of losses that can be offset. These apply to trading losses carried forward so that the overall sum that can be mitigated using most sorts of carried forward loses (including trading losses carried forward before or after 1st April 2017), is restricted to the amount of allowance up to £5m, plus 50% of the remaining total profits following deduction of the allowance.
You must keep separate records for trading losses carried forward your company made:
- Before 1st April 2017
- On or after 1st April 2017
Other records a limited company needs to keep are:
- Records about the company itself
- Accounting and financial records
- Details of directors, company secretaries, and shareholders
- Results of any shareholders’ resolutions and votes
- Promises of the company to repay loans by a particular date, and who they need to be paid back to
- Transactions of new shareholders
- Any loans or mortgages secured against the company’s assets
Carrying a trading loss back
If you choose not to carry a trading loss forward, you can claim for a loss to be offset against profits for an earlier 12-month period. This should not be confused with the accounting period.
Carrying a trading loss back can only be claimed by companies carrying on the same trade at some point during the accounting period, or periods falling within the earlier 12-month period. For example, if a company has a trading loss of £8,000 in the accounting period 1st January 2016 to 31st December 2016, and profits of £20,000, the £8,000 loss can be carried back and offset against profits, meaning a reduction from a profit of £20,000 to £12,000.
If an accounting period straddles a 12-month period, the profit for that period is divided, and the loss offset against the portion of the profit falling within the 12-month period. For example, if your company made a loss of £8,000 in the accounting period between 1st January 2016 to 31st December 2016, and changed its accounting date so the accounting period and profit of the earlier periods to:
- £2,000 for 1st July 2015 to 31st December 2015
- £10,000 for 1st July 2014 to 31st July 2015
£2,000 of the loss can be carried back to cover the entire profit in the period ending 31st December 2015. The balance of the £6,000 loss cannot be carried back in its entirety because only six months of the profits in the sum of £10,000 fall into the earlier 12 months of the loss-making period. A loss of £5,000 can be used, leaving the balance of £1,000 available to be carried forward to the year ending 31st December 2017.
Temporary COVID extension to carrying back trade losses
In 2021, the government announced a temporary extension to the carrying back of trade losses from one to three years, for losses up to £2,000,000 for accounting periods between 1st April 2020 and 31st March 2022. Losses must be offset against profits of the most recent years first before carrying back to previous years.
Claim for extended loss to be carried back must be made via a Company Tax Return. Although a ‘de minimis’ limit of £200,000 can be made outside a return. This means that companies, or company groups with losses, can make a claim in respect of a relevant accounting period without having to wait to submit its next tax return.
A de minimis claim can be made outside a company tax return by submitting it to HM Revenue & Customs (HMRC), giving the following information:
- The company’s Unique Tax Reference (UTR) number
- The company name
- Its agent code (is applicable)
- The start and end dates of the loss-making accounting period
- Amount of the loss
- Dates of the accounting period to carry back the loss, and the relevant amounts
- Management accounts if a tax return has not been completed for the loss-making accounting period
Claiming a trading loss to be carried back
A claim for a trading loss to be carried back can be made when submitting the Company Tax Return for the period when the loss was made. A claim can be made either within the return or in an amendment to the return, providing it is made within the specified time limits. A claim can also made via letter.
For claims that reduce Corporation Tax liability for an earlier period, an ‘X’ must be placed in the appropriate box on form CT600.
Claims for carrying back trading losses should be made within two years of the end of the accounting period when the loss was made, and should include:
- The company’s name
- The period when the loss was made
- The amount of the loss
- How the loss is to be used
Claims made separately from the company tax return can be sent directly to HMRC.
Amending a company tax return
Changes and amendments must be made within 12 months of the filing deadline (12 months after the end of the accounting period it covers), by logging in to HMRC online services, using commercial software (if applicable), or by sending a paper return or by writing to the tax office assigned to the company.
If HMRC does not complete a compliance check into the return, stand-alone claim or later amendment, the amount of the loss becomes final. Although HMRC can still ask about the use of the loss in a future tax return to check whether the company is carrying on the same trade.
If you have already paid the tax due in an accounting period and then offset a loss against it, HMRC will send you a repayment provided you do not owe any Corporation Tax, which will be deducted from the sum due to be repaid.
Terminal loss relief
When a company ceases to trade during an accounting period, the trading losses built up during the final 12 months of trading, can be carried back and offset against total profits over an extended period of 36 months ending immediately before the terminal loss-making period.
If the final accounting period is less than 12 months, any trading losses built up during the next-to-last accounting period are divided on a time basis and added to the losses in the final accounting period to enable relief to be obtained for losses acquired over the final 12 months.
Corporate tax & trading loss FAQs
How many years can corporation tax losses be carried back?
Under the standard rules, businesses can carry back trading losses from one year, and put these against profits in the previous year. However, temporary COVID provisions are allowing businesses to carry back a loss up to three years if the accounting period in which the loss arises falls between 1st April 2020 and 31st March 2022.
How do you use corporation tax losses?
If a company incurs a trading loss, it may be able to claim relief against corporation tax liabilities against total profits in the current accounting period, or to carry back the loss and offset it against total profits in the previous 12 months or carry forward the trading loss and set this against total profits of a later period.
Is corporation tax paid on losses?
If a company is liable for Corporation Tax and has made a loss from trading, sale of a capital asset, or on property income, it may be able to claim relief from Corporation Tax and reduce the amount payable.
What happens if my limited company makes a loss?
Under the normal loss rules for companies, the loss could be offset against other income in the same year, carried back a year or carried forward against future profits.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law or tax rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert professional advice should be sought.