Corporation Tax Relief for a Trading Loss

Companies are liable to pay corporation tax on their trading profits at the end of their accounting period. However, it is not uncommon for companies to produce a trading loss, particularly in the current economic climate. This article will look at the relief options available to companies with trading losses under the Income and Corporation Taxes Act 1988 (ICTA).

It is important to note that a company is able to claim relief under more than one of the following provisions, although it may not claim relief for the same loss twice.

Terminal Carry Back Relief – section 393A ICTA

This relief only applies to a company which has ceased trading and has sustained a trading loss in its final 12 months of trade. Under these circumstances, a company may set its loss against profits from any accounting period in the three years preceding its final 12 months, regardless as to whether those profits are of an income or a capital nature. The loss must be set against the most recent period first.

Carry Across/Carry Back Relief – section 393A ICTA

A company’s trading loss can be carried across to be set against profits for the same accounting period, regardless as to whether those profits are of an income or a capital nature. If this does not cover the whole of the trading loss then the company may recover corporation tax it has previously paid by carrying back the remainder of the loss and setting it against profits from the previous accounting period.

Carry Forward Relief – section 393(1) ICTA

This section allows a company to carry its trading loss forward to be set against its profits in future accounting periods until the loss has been fully absorbed. However, section 393(1) can not be used against non-trading income or against capital gains.

There are several factors which a company will need to consider when deciding whether to carry forward a trading loss or to set it against profits from the same or previous periods. The company will need to assess whether it will be able to produce a trading profit in the following accounting period and whether its cash flow status means there is an advantage in obtaining relief under ICTA sooner rather than later. It will also need to consider the rate of corporation tax for previous accounting periods and whether this is likely to change in the future.

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