Trading losses are not ideal but you may be able to claim corporation tax relief when you operate your business through a limited company.
Predictability is the cornerstone of good financial management.
Most households find it easy to manage their finances when they have a clear idea of how much money is coming into the home, and how much goes out.
Most entrepreneurs, however, don’t have the luxury of predictability.
Those who run their own businesses know that despite their well-informed projections and prognostications, the future of their finances can be hard to read.
Businesses may reap healthy profits one year, yet struggle to break even the next year or even trade at a loss.
Trading losses aren’t a great prospect
Making a loss is rarely a palatable prospect to entrepreneurs who run their businesses through a company rather than as a sole trader.
What’s more, the prospect of a robust tax bill nine months after the year end, can exacerbate an already delicate financial situation.
If your business is normally taxed while trading at a loss, it can risk placing a stranglehold on your cash flow and your business.
The good news, however, is that relief may be available to you if your business is operated through a company and you make a loss.
This loss can be offset against the total profits of the current accounting period or even previous accounting periods.
It can also be carried forward and offset against future income.
All-too often, promising enterprises have been hobbled by large tax bills which have been disproportionate to their profits.
All because they were unaware of the relief that is available to them.
Here we’ll look at how to seek the relief that can help you weather stormy financial horizons with confidence.
Computing the trading loss
Before we can talk about seeking relief for a trading tax loss, that loss must first be quantified.
A trading tax loss is computed in exactly the same way as a trading profit is calculated.
That said, it bears mentioning that trading income does not include any chargeable gains.
Chargeable gains are the value of your assets (i.e. your products/stock) between the time the assets are purchased and the time they are sold, the gap between the purchase and sale often being over a number of years.
Thus, chargeable gains are not taken into account when computing the loss.
The tax loss loss is also augmented by capital allowances for assets like machinery, vehicles, equipment and other capital expenditures.
The tax loss may also be reduced by any balancing charges.
Who is entitled to tax relief?
So, having ascertained that your corporation is currently trading at a taxable loss, how do you know that you are eligible for relief?
According to HMRC guidelines, a company can only obtain relief for a loss while the company facilitating the trade is responsible for corporation tax in respect of that trade.
The trade must also be on UK soil.
Thus, if your business is resident in the UK or resident overseas but carrying out the trade through a UK branch or agency they are eligible for relief.
Thus, if your business operates solely within the UK there is an excellent chance that your trading loss will be eligible for relief.
Relief against total profits of the same period
The key to successful tax management is the ability to be reactive and agile.
Thus, if you are able to compute your loss you may be able to make a claim for relief against the total profits of that same accounting period.
Where this is not possible, relief can still be given against profits of a previous period or even earlier periods (we’ll get to that shortly).
Remember that chargeable gains are not included in the computation of the trading loss.
Thus, if the company has chargeable gains within the same accounting period within which their loss was incurred, these can be sheltered by the loss.
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Relief against total profits of a previous period
If your loss comes within a period of low (or even zero) profit, the good news is that relief can be claimed against the total profits of a previous period.
At least, within limits.
Once trading loss has been set against the total profits of the period in which it was incurred, the balance of the loss can be carried back.
It can, in fact, be set against the total profits of previous accounting periods within 12 months of the beginning of said loss-making accounting period.
It’s worth noting that before a loss can be carried back, it must first have been set against total profits of the period in which the loss was incurred.
However, any loss that still remains after being offset against current year profits does not necessarily need to be carried back.
In fact, it can even be carried forward. Let’s see how…
Carry forward against future profits
There are sometimes when a trading loss is simply a blip that a company’s CEO knows it can overcome.
Thus, those companies who have traversed rocky ground but are feeling bullish about their future can carry their loss forward against future trading profits from the same trade.
Remember, however, that losses which are carried forward can only be set only against future trading profits and not against any future chargeable gains which may arise.
What’s more, losses may be carried forward without needing to first to make a claim against total profits of the current period.
For some this may make carrying losses forward more advantageous than carrying them backwards.
Losses that remain after being carrying back to a previous period, can even be carried forwards against ongoing profits from the same trade.
What is group relief?
If your company is a member of a group, there may be yet more opportunities for relief.
You may be able to surrender your losses to other companies within the group, allowing the whole group to benefit from the tax relief of losses. In order to qualify for group relief, said companies must be 75% subsidiaries of your company or vice versa.
This applies to trading losses but group relief can also be applied to;
- Capital allowance excesses.
- A non-trading loan relationship deficit.
- Certain charitable donations.
- UK property business losses.
- Non-trading fixed asset losses.
- Management expenses.
What is terminal loss?
If your business makes a loss within its last 12 months of trading this can exacerbate already difficult circumstances.
The good news, however, is that when a loss is made in the last 12 months of trading this is known as a terminal loss and can be carried back against total profits outside of the usual 12 month parameters, going back as far as the preceding three years.
Anti-avoidance measures every corporation should know about
Needless to say, your corporation will want to steer clear of any behaviour which may be misconstrued by HMRC as tax avoidance.
There are a number of anti-avoidance measures which the government has but in place to prevent abuse of the loss relief rules, and all corporations should familiarise themselves with these.
This includes restrictions where losses are uncommercial in nature or where there is a change in the nature of the trade.
Corporation tax planning
As you can see, navigating the intricacies of corporation tax and trading losses can be something of a minefield.
You wouldn’t be the first corporation to fall afoul of HMRC simply for failing to understand the myriad complexities of the corporation tax system.
Fortunately, Wagners can help you with making a claim for corporation tax relief where losses are incurred and every other aspect of corporation tax planning.
If you feel that your corporation tax bill is consistently disproportionate to your real-terms profits it’s time to get in touch.
Our team of helpful and highly knowledgeable experts can help to ensure that your taxes remain proportionate and your profits remain intact.
Where a loss is made, we will work tirelessly to ensure that your company gets the relief it deserves.
Don’t delay, get in touch today!