A guide to Corporation Tax trading losses

While a trading loss is never good news for any business, it’s important to use that loss efficiently to reduce current or prior Corporation tax bill where relief is available.

If you are an early-stage business in your first three years of operation, you may be able to claim relief for qualifying pre-trading expenditure, which is treated as incurred on the first day of trading and can be deducted from early profits.

In this article we explain the options available to your business for offsetting Corporation Tax trading losses and outline the available loss relief options 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 your allowable business expenditure exceeds your income. It’s important to only take into account ‘allowable business expenditure’ because not all business expenditure can be set against Corporation Tax, whether you make a profit or a 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 business assets, such as equipment and machinery, computer equipment and motor vehicles.

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 your latest accounting period, enter ‘0’ in box 155 on form CT600 and put the full amount of the loss in box 780. You should also enter the whole loss, or as much of the loss as you can claim, in box 275 against your total profits.

Claiming relief for trading losses

If you have a trading loss, you have a number of options for claiming relief against Corporation Tax liabilities:

• You could set the trading loss against total profits in your current accounting period

• You could carry the trading loss back and set it against your total profits in the previous 12 months.

• You can carry forward trading losses to offset against future profits. For losses arising on or after 1 April 2017, these can generally be set against total profits, subject to restrictions for larger companies, including the £5 million deductions allowance and a 50% restriction on profits above that threshold.

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 total profits, including non-trading income total £30,500.

• Your allowable losses total £15,000.

• Your Corporation Tax liability will be reduced to £15,500.

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.

EXAMPLE

• Your company makes an allowable loss of £8000 in your current accounting period.

• You made a profit of £20,000 in the accounting period that fell in the previous 12 months.

• You can offset the £8000 loss against the £20,000 profit.

• Your Corporation Tax liability for the previous 12-month period will be reduced to £12,000 and you will receive a rebate from the tax you have already paid.

Claiming trading losses for new businesses

If you are a new business in your first three years of trading, you may be able to take into account pre-trading expenditure necessary to set up your business, including:

• Market research, advertising, website and social media costs

• Product development, prototype, licensing and patent costs

• Brand development costs

• Essential equipment and machinery costs

• Fees to lawyers, accountants and consultants

Where it qualifies, that expenditure is in addition to your normal allowable business expenditure during the first three years of trading.

Qualifying pre-trading expenditure incurred up to 7 years before the start of trading may be treated as incurred on the first day of trading, provided it would have been allowable if incurred after trading began.

EXAMPLE

• You make a loss of £5,000 in your first year of trading and a profit of £10,000 in your second year of trading.

• You incurred £3,000 of qualifying expenditure before you started trading.

• The £3,000 of qualifying pre-trading expenditure is treated as incurred in your first accounting period, increasing the trading loss available to carry forward. This can then be offset against future profits, reducing your Corporation Tax liability to £3,000 in the second year.

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 profits fall between £50,000 and £250,000, you will be within the marginal relief band for Corporation Tax, with an effective rate between 19% and 25%.

In some cases, it may be more beneficial to carry forward losses to offset against future profits taxed at a higher effective rate, depending on your expected profitability.

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.