CTM05010 | Corporation tax: restriction on relief for carried-forward losses: introduction
From HM Revenue & Customs · Company Taxation Manual
F(2A)17 introduced a restriction on the amount of relief that companies can obtain for carried-forward losses, at .
With effect from 1 April 2017, companies with profits in excess of any deductions allowance (which is a maximum of £5 million) are no longer able to reduce profits to nil by using relief for carried-forward losses. Broadly, a company's profits after deduction of
any in-year reliefs (reliefs of the year that are set against total profits such as group relief) (), and
the deductions allowance ()
can only be reduced by up to 50 per cent by carried-forward losses.
For example, a company with £12 million profit remaining after in-year reliefs that has access to the maximum £5m deductions allowance will be able to cover only a maximum of £8.5m profits by carried-forward losses (the £5m deductions allowance plus 50 per cent of the remaining profits of £7m of profits). The result of this is that a company will pay tax on £3.5m.
Where a company is a member of a group (), the deductions allowance is shared amongst the group members as they see fit. The allowance is allocated to companies that are members of the group by a nominated company.
There is no restriction if a company's qualifying profits () are below the amount of that company’s deductions allowance. The qualifying profits are, very broadly, the company’s in-year profits less any in-year reliefs and any deductions for carried-forward allowable capital losses.
As a result, the restriction is unlikely to affect the amount of relief. Most small companies or groups are able to obtain for carried-forward losses.
A company should specify the amount of its deductions allowance in its tax return.
A company with streamed restricted carried-forward losses () will also need to show how it has allocated its deductions allowance between its trading and non-trading profits and, from 1 April 2020, its chargeable gains ().
The restriction for trading losses, non-trading loan relationship deficits, management expenses, UK property business losses and non-trade losses on intangible fixed assets has effect for profits arising from 1 April 2017 but can apply to losses carried forward from any period, including losses carried forward at 1 April 2017.
The restriction for capital losses carried forward has effect for chargeable gains accruing after 1 April 2020 and applies to carried forward losses from any period including losses arising before 1 April 2020.