When are claims for carried forward (c/fwd) loss relief restricted? Who is impacted by these restrictions? What are the compliance obligations associated with these restrictions?
A guide for subscribers.
At a glance
This guidance note specifically addresses the restriction applied to c/fwd loss relief claims when a company surpasses the relevant maximum limits, introduced in April 2017. For broader guidance on corporate loss reliefs and associated restrictions, please consult Losses: Trading and other losses.
From 1 April 2017
- Carried forward loss relief claims can be restricted.
- This restriction applies to all brought forward (b/fwd) losses, regardless of whether they arose pre or post-April 2017.
- The maximum b/fwd loss relief claim is restricted to the lower of:
- the unrelieved b/fwd trading losses
- 50% of the company's unrelieved profits
- The restricted amount of carried forward losses may be increased if a company claims its Deduction Allowance (DA) for that period.
- DA of £5,000,000 per accounting period is available for each standalone company (or, in the case of a group of companies, the group as a whole).
- The DA must be proportionally reduced for accounting periods of less than 12 months.
Compliance requirements
- Standalone companies must detail the specified amount of DA claimed in their supporting computations.
- Companies within a group must:
- Nominate a company.
- The nominated company is required to submit a Group Allowance Allocation Statement (GAAS) to HMRC for every accounting period.
- Each company within the group must detail the specified amount of DA claimed in their supporting computation. This should match the amount shown on the GAAS.
Failure to follow the above guidance could lead to none of the companies being entitled to claim the DA and, potentially further restricting loss relief.
Overview
From 1 April 2017
- Carried forward loss relief claims can be restricted.
- This restriction applies to all brought forward (b/fwd) losses, regardless of whether they arose pre or post-April 2017.
- The maximum b/fwd loss which can be offset against profits of accounting periods beginning on or after 1 April 2017 is restricted to the lower of:
- The unrelieved b/fwd trading losses.
- 50% of the company's 'unrelieved profits'.
- The restricted amount of carried forward losses may be increased if a company claims its Deduction Allowance (DA) for that period.
- DA of £5,000,000 per accounting period is available for each standalone company (or, in the case of a group of companies, the group as a whole).
- The DA can be allocated between group companies as the company or group sees fit.
- The DA must be proportionally reduced for accounting periods of less than 12 months.
'Unrelieved profits' are the total profits less any current year loss relief.
How to calculate
- The legislation in this area is highly complex.
- The below steps are simplified and look at a simple carried forward (c/fwd) loss relief claim.
- If a company has streamed losses, it will need to calculate the relevant maximum for the type of profits against which those losses can be relieved together with the relevant maximum for total profits.
- If the company has no streamed losses and all carried forward losses are relevant deductions it need only calculate the relevant maximum for total profits.
Step 1: Calculate the modified total profit. Generally, this is the company's total profits before any current-year reliefs.
Step 2: Calculate the amount of unrestricted losses available to offset against total profits.
- This is known as the 'Step 2 amount'.
- It is the sum of any amounts which could be relieved against the company's total profits of the accounting period i.e. a current year trading loss or non-trading loan relationship deficit.
- If the 'step 2 amount exceeds the modified total profit, the 'qualifying trade profits', 'qualifying non-trade profits' and/or 'qualifying chargeable gains' are nil, you can proceed to Step 6.
- If the 'Step 2 amount is lower than the modified total profit proceed with Steps 3 to 5.
Step 3: Split the modified profits into trade, non-trading profits and chargeable gains.
Step 4: Allocate the Step 2 amount against trade profits, non-trade profits and chargeable gains.
Step 5: The Step 4 amount equals the 'qualifying trade profits', 'qualifying non-trade profits' and/or 'qualifying chargeable gains'.
Step 6: Calculate the company's relevant profits. These are the qualifying profits less the company’s deductions allowance.
Step 7: Calculate the 'relevant maximum'. This is 50% of the relevant profits plus the amount of the deductions allowance.
The relevant maximum is the maximum amount of restricted carried-forward losses that the company can deduct from its profits of the accounting period.
The position is complicated where the company has streamed restricted carried-forward losses.
Example
Company C has an accounting period ending 31 March 2020.
In that period, its profits are as follows:
- Trading profits of £20 million,
- Property business profits of £5 million.
- Its in-year reliefs are Non-Trading Loan Relationship Deficits (NTLRDs) of £4 million.
- The company’s carried-forward losses at the beginning of the period are post-1 April 2017 trading losses of £15 million.
- The company is not in a group and has a full £5 million deductions allowance.
Step 1: Calculate the modified total profit. Company C's total profits are £20m.
Step 2: Calculate the amount of unrestricted losses available to offset against total profits. Company C has in-year reliefs of £4m. The 'Step 2 amount of £4m is lower than the modified total profit of £20m and we proceed with steps 3 to 5.
Step 3: Split the modified profits into trade, non-trading profits and chargeable gains. Company C only has £20m trade profits, there is no need to carry out the split.
Step 4: Allocate the Step 2 amount against trade profits, non-trade profits and chargeable gains. Company C only has trade profits, the £4m is allocated against the modified trade profit of £20m.
Step 5: The Step 4 amount equals the 'qualifying trade profits', 'qualifying non-trade profits' and/or 'qualifying chargeable gains'. The qualifying trade profits are £21m (£20m - £4m).
Step 6: Calculate the company's relevant profits. Company C's relevant profits are £16m (£21m - £5m)
Step 7: Calculate the 'relevant maximum'. Company C's relevant maximum is £13m.
The relevant maximum is the maximum amount of restricted carried-forward losses that the company can deduct from its profits of the accounting period. Since the company has no streamed restricted carried-forward losses, it can use relevant deductions up to the full £13 million amount.
Company C's only relevant deductions are its £15 million post-1 April 2017 trading losses carried forward against total profits. It uses the full £13 million possible. The balance of £2 million is carried forward to the following period.
*The above example has been taken from HMRC's guidance (CTM05260)
Compliance Requirements
- Nomination
- The group must make the 'group allowance nomination' to nominate one of their companies as the nominated company.
- Please refer to 'The Group Allowance Nomination Template'
- Whilst you are not required to submit this to HMRC, you must keep a record of this document on file so that it would be available upon request by HMRC.
- Group Allowance Allocation Statement (GAAS)
- The nominated company must then submit a GAAS to HMRC for each accounting period in which it is a nominated company of the relevant group.
- The allocation statement is usually submitted within 12 months of the CT600 filing date.
- We would recommend that it is filed with the CT600s (12 months after the end of the accounting period).
- HMRC have a GAAS template.
- Individual Company Tax Returns/ CT600
- Claims for c/fwd relief should usually be made within 24 months of the end of the accounting period.
- The amount of deductions allowance claimed must be included on the supporting computations and submitted to HMRC.
Failure to follow the above guidance could lead to none of the companies being entitled to claim the deductions allowance and, therefore, further restriction of loss relief.
The Group Allowance Nomination Template
The Group Allowance Nomination
Effective Date of the Group Allowance Nomination:[DATE (see Note 1)]
We hereby nominate [NAME OF NOMINATED COMPANY] to be the nominated company in accordance with s.269ZS Corporation Tax Act 2010 (CTA 2010)
[NAME OF GROUP COMPANY (see Note 2)]
Signed:_______________________ Date:______________
Full Name: [FULL NAME OF APPROPRIATE PERSON (See Note 3)]
Position: [POSTION OF APPROPRIATE PERSON i.e. Director]
On behalf of [NAME OF GROUP COMPANY]
[NAME OF GROUP COMPANY]
Signed:_______________________ Date:______________
Full Name: [FULL NAME OF APPROPRIATE PERSON (See Note 3)]
Position: [POSTION OF APPROPRIATE PERSON i.e. Director]
On behalf of [NAME OF GROUP COMPANY]
[NAME OF GROUP COMPANY]
Signed:_______________________ Date:______________
Full Name: [FULL NAME OF APPROPRIATE PERSON (See Note 3)]
Position: [POSTION OF APPROPRIATE PERSON i.e. Director]
On behalf of [NAME OF GROUP COMPANY]
[NAME OF GROUP COMPANY]
Signed:_______________________ Date:______________
Full Name: [FULL NAME OF APPROPRIATE PERSON (See Note 3)]
Position: [POSTION OF APPROPRIATE PERSON i.e. Director]
On behalf of [NAME OF GROUP COMPANY]
Notes
Note 1: Nomination Date
- In accordance with s.269ZS (5) CTA 2010, a Group Allowance Nomination must state the date on which it is to take effect.
- The date may be earlier than the date the nomination is made.
Note 2: Group Company
- The nomination must be made be all the companies in the group that are within the charge to Corporation Tax s.269ZS(1) CTA 2010
- This includes dormant companies if they are still within the charge to Corporation Tax within the meaning of s.1167 CTA10.
Note 3: Appropriate Person
- In accordance with s.269ZS (5) CTA 2010 a Group Allowance Nomination must be signed by an appropriate person on behalf of each company that is, when the nomination is made, a member of the group and within the charge to corporation tax.
- 269ZS (9) defines an ‘Appropriate Person’ as
- the proper officer of the company (defined by s.108 (3) and (4) Taxes Management Act 1970)i.e. Company Secretary
- such other person as may for the time being have the express, implied or apparent authority of the company to act on its behalf for the purposes of this Part.
- If an individual is the appropriate person with respect to more than one company in the group, there is no need for that person to sign the nomination multiple times, so long as they make clear which companies they are signing on behalf of.
Note 4: Submission of the Group Allowance Nomination
- You are not required to submit the nomination to HMRC.
- However, groups should have a nomination in place which meets the legislative requirements and should be able to supply this if it is requested.
Small print & Links
HMRC GAAS Template: CTM04836 - Corporation tax: CT loss reform: administrative requirements: template for the group allowance allocation statement
HMRC corporate loss relief guidance
Contains workings and examples, see also the examples in the various condocs on the 2017 and 2020 changes.
HMRC guidance on administrative requirements for the deductions allowance
