A guide to Corporation Tax trading losses

While a trading loss is never good news for a business, it is important to use that loss efficiently where relief is available. A company may be able to set a trading loss against total profits of the same accounting period, carry it back against profits of the previous 12 months, or carry unused losses forward for use against future profits.

If your company incurred qualifying revenue expenditure before it started trading, that expenditure may also be brought into the first period’s tax computation. This is not a separate “first three years” relief: qualifying pre-trading expenditure incurred within seven years before the trade starts is treated as incurred on the day the trade begins, provided it would have been allowable had it been incurred after trading started.

In this article, we explain the main options for offsetting Corporation Tax trading losses and the key restrictions to consider under current Corporation Tax rules.

However, there are many factors to take into account when choosing one of the available options. The decision can be complex depending on the circumstances of your business, so it may be important to take professional advice before making a final decision.

Calculating trading losses

A trading loss occurs when the company’s allowable trading deductions exceed its trading income, after the usual Corporation Tax adjustments have been made to the profit or loss shown in the accounts. This means you should distinguish between accounting costs and tax-deductible amounts: some items in the accounts are not deductible for Corporation Tax, while capital allowances may increase the loss.

HMRC sets out guidelines on calculating Corporation Tax trading losses on the Government website.

Allowable expenditure includes:

• Overheads such as rent, rates, light and heat

• Printing, postage and stationery (PPS)

• Marketing costs

• Stock and raw materials

• Staff salaries and subcontractor costs

• Finance charges

• Business travel and subsistence costs

• Capital allowances on qualifying plant and machinery, such as equipment, computers and qualifying business vehicles, subject to the relevant capital allowances rules.

Disallowable items of expenditure include depreciation on capital assets and costs of business entertaining.

Related: What Are Statutory Accounts? A Short Guide

Reporting a Corporation Tax trading loss

Trading losses, like profits, are reported on your annual Corporation Tax return in line with HMRC’s guidelines.

If your claim covers the company’s latest accounting period, HMRC says you should enter ‘0’ in box 155 on form CT600, put the full amount of the trading loss in box 780, and enter the whole loss, or as much as you are claiming against total profits, in box 275. If the return includes amounts carried back from later accounting periods, box 280 should also be marked, and the computations must identify the accounting period or periods from which the losses are carried back.

Claiming relief for trading losses

If your company has a trading loss, the main Corporation Tax relief options are:

• You can set the loss against total profits of the same accounting period.
• You can carry back unused losses against total profits of the previous 12 months, provided the company was carrying on the same trade at some point in the accounting period or periods falling within that earlier 12-month period.
• You can carry forward unused trading losses and set them against future profits, subject to the Corporation Tax loss relief rules.

A company cannot carry back a trading loss without first setting it against profits of the current accounting period. For accounting periods from 1 April 2017, carried-forward losses are subject to restriction where relevant: broadly, a standalone company or group has a deductions allowance of up to £5 million for a 12-month period, with most carried-forward loss relief above that allowance restricted to 50% of remaining profits.

Current accounting period

This option would be useful if you have non-trading income that forms part of your total profits. For example, you may have non-trading income within the company, such as interest income or chargeable gains or you might have made a profit on disposal of some assets.

Example 

Your company has total profits of £30,500, including non-trading income.
It has an allowable trading loss of £15,000.
If the loss is set against total profits of the same accounting period, taxable profits are reduced to £15,500. The Corporation Tax saving depends on the rate applying to the company for that period.

Previous 12 month period

You can only use this option if your business was carrying on the same trade at some point in the accounting period or periods that fall in the earlier 12-month period.

ExampleYour company makes an allowable trading loss of £8,000 in the current accounting period.
It made taxable profits of £20,000 in the earlier 12-month period.
If the carry-back conditions are met, the £8,000 loss can be set against those earlier profits, reducing taxable profits for that earlier period to £12,000. If Corporation Tax has already been paid for that period, HMRC may issue a repayment, subject to any other Corporation Tax owed.

Claiming trading losses for new businesses

Pre-trading expenditure for new companies

If your company incurred qualifying expenditure before it started trading, that expenditure may be treated as incurred on the first day of trading and included in the first period’s Corporation Tax computation.

Qualifying pre-trading expenditure must be revenue expenditure incurred for the purposes of the trade within seven years before the trade starts, and it must be expenditure that would have been allowable if incurred after trading had begun. Capital expenditure does not qualify under the pre-trading expenses rule, although separate capital allowance rules may apply to qualifying pre-trading capital expenditure.

Examples may include qualifying market research, advertising, website costs, professional fees and other revenue costs incurred wholly and exclusively for the purposes of the trade. Costs such as equipment, machinery, patents and some development expenditure need separate review because they may fall under capital allowances, intangible fixed asset rules, R&D rules, or other specific Corporation Tax provisions.

Example

Your company makes a trading loss of £5,000 in its first year and taxable trading profits of £10,000 in its second year.
Before trading began, it incurred £3,000 of qualifying pre-trading revenue expenditure. The £3,000 is treated as incurred on the first day of trading, increasing the first-year trading loss to £8,000.

If that loss is carried forward and set against second-year profits, taxable profits for the second year are reduced to £2,000. Assuming the company is taxable at the small profits rate of 19%, the Corporation Tax on those £2,000 profits would be £380, before considering any other reliefs, associated company rules or adjustments.

Carrying losses forward

In certain circumstances, it may be more beneficial to retain your losses and use them against profits in a future accounting period.

For example, several major customers have placed large orders that will be invoiced in your next accounting period, giving a potential boost to your trading profits.

If your company’s taxable profits fall between £50,000 and £250,000, it may be within the marginal relief band for Corporation Tax, with the effective rate increasing gradually between the small profits rate and the main rate. These limits are proportionately reduced for short accounting periods and by the number of associated companies, so they should not be applied without checking the company’s group and ownership position.

In some cases, it may be commercially better to preserve losses for use against future profits that would otherwise be taxed at a higher effective rate. However, this needs modelling carefully because loss claims can affect cash flow, repayments, marginal relief, group relief planning and the availability of losses in later periods.

Support from Accounts and Legal

This is a brief outline of the process of claiming relief on Corporation Tax trading losses. If you would like professional advice on any aspect of the process, or would like confirmation that you are complying with HMRC’s rules, our team of experienced tax accountants will be glad to help.

To find out more, please contact us on 0207 043 4000 or info@accountsandlegal.co.uk - you can get a quick accountancy quote for our services here.