If you’re running a small business then you need to understand how to utilise the accounting techniques available in order to minimise the tax which has to be paid in a particular accounting period. A corporation tax loss is defined as a situation in which the revenue pulled in by a business over a specific accounting period is exceeded by the expenditure over the same period.
For some businesses, particularly those which are start-ups or still in the earliest stages, a trading loss may be something which is expected. This is because investment in stock, property, plant and other expenses can exceed the money coming into the business until trading has been firmly established. Cash flow issues of this kind are to be expected when starting a business, but the good news is that it is possible to carry forward losses like this to the next accounting period.
Shifting income tax losses
In order for a loss of this kind to be carried forward it has to be a loss which is based on trading losses rather than losses on investments. In other words, if you are a merchant, the losses in question will be those which are counted as net losses, after your cash flow has been analysed and expenses deducted from the money generated by sales. In tax terms it needs to be remembered that the income in question needs to be taxable income from which allowable tax deductions have been made.
An example of how to carry forward income tax losses
If a company has an income of £2,000,000 over an accounting period and taxable deductions of £2,500,000 then the trading loss for this accounting period will be:
£2,000,000 minus £2,500,000 which equals an income tax loss of £500,000. The company won’t therefore have any tax to pay over this accounting period.
The benefit of carrying forward a loss to the next accounting period will become apparent if the company then goes on to make a profit in the next accounting period. If the profit which is made is £500,000 then the company will be liable to pay corporation tax at 40%. This will mean a tax bill of £200,000. The fact that the company made a loss in the previous accounting period can now be used to their advantage, however, since the loss can be carried forward to the new accounting period. This will reduce the tax to be paid significantly, and in many cases will mean that no tax has to be paid at all.
In some cases, the losses from one year can also be carried back, after which the company won’t be able to carry forward the same loss. There is currently no time limit for being able to carry forward a loss of this kind, as long as the losses apply to the same business or the same kind of business. In 2017 the UK government put forward a range of changes to the rules on carrying forward tax losses, but these – when they are passed into law – will only apply to those businesses which make profits in excess of £5 million, and so will not apply to the vast majority of merchants.
When you fill in a Company Tax Return the trading losses will be carried forward to offset against profits automatically, whereas carrying profits back involves making a claim on taxes paid in a previous accounting period.