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What are corporation tax losses?

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Last editedFeb 20222 min read

Corporation tax losses are, very simply, the losses made by a business in a particular accounting period. These are particularly important to small businesses, which can typically be expected to make a loss in their early years of trading. You can recoup some of the cost of these losses through tax relief by either carrying it back or carrying it forward to another accounting period.

What is corporation tax loss carry back?

Corporation tax loss carry back is likely to be particularly relevant to many businesses in 2020, who may have seen a dip in their profits compared to previous years due to the economic ramifications of COVID-19. You can choose to carry back your losses to reduce your liability for taxes in an earlier accounting period so that you are required to pay less than you initially anticipated. This is an alternative to carrying the loss forward, which means you can offset the loss against future tax liability.

What changes have been made to corporation tax loss relief?

There were significant changes made to corporation tax losses by the Finance (No. 2) Act 2017. The most significant impacts of this Act came in two forms: relaxation in some areas and restriction in others. The relaxation allows a more flexible application of losses carried forward and is more relevant to small businesses. It means that losses can be applied to company total profits rather than being particular to one type of trade and opens the door to group relief. On the other hand, the restriction introduces a deduction allowance and limits relief to up to 50% of profits beyond this mark.

Is my business entitled to relief?

The criteria for working out if your business is eligible for corporate tax loss is fairly straightforward. If you pay corporation tax and you make a loss in a particular accounting period, you may be eligible to claim relief. Losses can refer to trading income but can also include disposal of a capital asset and property income.

How do I work out my business’s total loss?

Losses are calculated in the same way as profits and arise when your expenses outweigh your income. While you will undoubtedly have your own accounting system in order to keep track of these numbers internally, losses for tax purposes need to be declared using the official HS227 form that can be found on the gov.uk website.

What corporation tax capital loss relief is available?

As mentioned, corporation tax loss relief can come in different forms. You may choose to carry it forward to a future accounting year, or you may decide to carry it back. You can also offset it against the gains or profits in other areas of your business in the same accounting year.

What are the rules around terminal loss?

Terminal loss is a type of tax relief only applicable if your business has – or is soon to have – ceased trading. If your company has made a loss in its final 12 months of trading, you may be able to claim relief with a broader scope than in ordinary cases. The current terminal loss tax relief rules allow a business to offset trading losses against any or all profits made in the three years preceding the period of the loss. It is essential to know that you’re required to start by offsetting profits in the most recent year, and you can extend to up to three years if the total loss is not covered by this period.

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