COURSE: ACCA – TAXATION (TX)

Lecture Topic: Corporation Tax – Losses

There are three (3) types of losses that are examinable in a corporation tax question:

(i) Trading Losses

(ii) Property Business Losses
(iii) Capital Losses

1. Trading Losses

Companies that incur trading losses can obtain relief in different ways:

1.1 Current Period and Carry Back Reliefs

o A company may claim to set a trading loss against total profits of the same accounting period in which the loss is
incurred.

o Any trading loss remaining unrelieved may then be carried back and set against total profits of the previous 12
months.

o In each case, the loss must be set off to the maximum possible extent.

o Companies can claim to relieve a loss against current period profits and not claim to carry the loss back. However, if a
loss is to be carried back, a claim for current period relief must have been made first (if possible).

o Any carry back is to more recent periods first.

o Relief for earlier losses is given before relief for later losses. Therefore, a trading loss carried back is relieved after any
trading losses brought forward have been offset.

o A claim for relief against current or prior period profits must be made within two years of the end of the accounting
period in which the loss arose.

1.2 Carry Forward Relief

o Trading losses not relieved under a current period claim or a carry back claim may be carried forward and set off
against total profits from the same trade in future accounting periods.

o The loss can be carried forward indefinitely, but it must be set off against the first available profits.

o Unlike current period claims and carry back claims, under carry forward loss relief the company can restrict its
loss relief to prevent qualifying charitable donations from remaining unused.

1.3 Terminal Loss Relief

o Where a company incurs a trading loss in the final 12 months of the trade, the company can set the loss against total
profits of the same accounting period in which the loss is incurred.

Any loss remaining unrelieved may then be carried back and set against total profits of the previous 36 months (later
periods first).

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2. Factors influencing choice of loss relief

a) How quickly relief will be obtained

Relief against current and prior period profits will probably result in a repayment of corporation tax, whereas relief
against future profits will only result in a reduction of a future tax liability.

b) Qualifying Charitable Donations

Certain claims for loss relief may lead to relief for qualifying charitable donations being lost.

c) Rate of Tax

Losses should be set against profits that are chargeable at the highest rate of tax.

3. Other tax planning points

A company can reduce a loss by not claiming full capital allowances in a particular period. This can help the company
to save tax at a higher rate and/or prevent the wasting of any qualifying charitable donations.

This will result in higher tax written down values carried forward and therefore, higher capital allowances in future
years.

4. Other losses
(i) Capital losses

Capital losses can only be set against chargeable gains.

Capital losses are first set against gains of the same accounting period.

Any unrelieved losses are carried forward to set against the first available gains of future accounting periods.

Capital losses must be set off to the maximum possible extent.

(ii) Property business losses

Property business losses are first set off against the total profits of the same period.

Any excess loss is then carried forward for set off against future total profits.

Carried forward property businesses losses can also be restricted to prevent the wastage of any qualifying
charitable donations.

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Questions

1.
Unicorp Ltd has the following results:

Year ended 3 months to Year ended Year ended

31.12.2016 31.03.2017 31.3.2018 31.3.2019
£ £ £ £
Trading profit/ (loss) 20,000 15,000 (80,000) 15,000
Interest income 4,000 1,000 2,000 1,000
Chargeable gain nil nil 3,000 2,000
Qualifying Charitable donations 1,500 1,500 1,500 1,500

Calculate the company’s taxable total profits for the accounting periods shown above.

2.
Volatile Ltd. commenced trading on 1 July 2017. The company’s results for its first five periods of trading are as follows:

Period ended Year ended Year ended Period ended Year ended
31.12.2017 31.12.2018 31.12.2019 30.09.2020 30.09.2021
£ £ £ £ £
Trading profit/ (loss) 44,000 (73,800) 86,500 78,700 (186,800)
Property business profit 9,400 6,600 6,500 - -
Chargeable gain/ (loss) 5,100 - (2,000) 11,700 -
Qualifying charitable donations (800) (1,000) (1,200) - -

(a) State the factors that will influence a company’s choice of loss relief claims. (2 marks)

(b) Assuming that Volatile Ltd claims relief for its trading loss as early as possible, calculate the company’s taxable
total profits for the six-month period ended 31 December 2017, each of the years ended 31 December 2018 and
2019 and the nine-month period ended 30 September 2020. Your answer should also clearly identify the amount of
any unrelieved trading losses as at 30 September 2021. (8 marks)