CORPORATION TAX LOSSES

1
CORPORATION TAX LOSSES
Theory and Practice of Taxation BModule code
C33TB2Lecture 11
2
Trading losses
of a CAP

can be set off against
Total
profits of preceding year??-----------??Future
trading profits S 393A(1) (b)

S 393 (1)

? ?
Total
profits of the CAP
S 393A(1)(a)
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CORPORATION TAX
LOSSES 1. TRADING LOSSES If adjusted trading
profit (applying Schedule D Case I rules) less
capital allowances of a Chargeable Accounting
Period gives a loss (a) S 393 (1) Trading
losses may be carried forward and relieved
against future (Schedule D Case I) trading
profits (b) S 393A (1)(a) Trading losses may
be relieved against the total chargeable profits
(before deducting charges) of the CAP in which
the loss arises. (c) S 393A(1)(b)Such trading
losses may then be relieved against the total
profits (after deducting trade charges but before
deducting non-trade charges) of an accounting
period falling wholly or partly within the twelve
months before the start of the CAP in which the
loss arises.(d) Where the loss arises in the 12
months immediately preceding cessation of trade,
the 12 month carry back period is extended to 36
months.
4
S 393 (1) RELIEF (against future trading profits)
Will automatically apply unless some other
relief is requested. Set off against the
first available Schedule D Case I profit of the
same trade. (Gordon Blair Ltd v CIR)If the
company terminates its trade and starts another
trade it will lose the trading losses. ANTI
AVOIDANCEA company may lose its S393(1) losses
when a change of ownership of the company is
associated with major change in the nature or
conduct of the business. (E.g. Type of property
dealt in, services/facilities provided,
customers, outlets or markets) ORIf prior to
the change in ownership of the company, the
business had become negligible and after the
change of ownership business revives.
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S 393 (1) RELIEF

• A company makes its accounts up to 30 June each
  year y/e 30/6/06 y/e
  30/6/07
  Trading
  profits/(losses) (17,600)
  8,700 Bank interest received
  1,000 200

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S 393 (1) RELIEF

• Solution y/e
  30/6/06 y/e 30/6/07
  
  Sch D I
  0 8,700Less S.
  393(1) relief
  8,700Sch D I
  0 0Sch D
  III 1,000
  200Chargeable profits
  1,000 200Sch D I loss
  17,600Less S. 393(1) 6/06
  8,700 c/fwd S 393(1)
  8,900

7
UNRELIEVED CHARGES ON INCOME Charges on Income
are deducted from total chargeable profits of the
CAP in which they are paid. If profits are
insufficient to absorb the Charges? - unrelieved
Charges On Income Trade charges- (formerly
royalty payments) -carry forward to deduct
against future trading profits merged with
S393(1) losses NONE. Now only Non-trade
charges (gift aid) - cannot be carried forward-
must remain unrelieved.
8
UNRELIEVED CHARGES ON INCOME - EXAMPLEA
company makes its accounts up to 30 June each
year y/e 30/6/05 y/e 30/6/06 y/e
30/6/07
Trading profits/(losses)
(17,600) 8,700 14,900 Bank
interest received 1,000 200
500 Gift aid donation (gross)
2,300 2,700
3,100
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UNRELIEVED CHARGES ON INCOME - SOLUTION

• y/e 30/6/05 30/6/06
  30/6/07
  
• Sch D I 0 8,700
  14,900
• S. 393 (1)
• relief 0 8,700
  8,900
• 0 0 6,000
• Sch DIII interest 1,000 200
  500
• 6,500
• Less Charges
• Non-trade (1,000) (200)
  (3,100)
• Chargeable 0 0
  3,400
• Non-trade (2,300) (2,700)
  (3,100)
• Used 1,000 200
  3,100
• lost 1,300
  (2,500) 0

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UNRELIEVED CHARGES ON INCOME - SOLUTION Workings
of S393(1) relief and Charges On Income

• Loss Memorandum
• Year to 30.6.05 Schedule D I 17,600
• Year to 30.6.06 Used -8,700
• c/fwd 8,900
• Year to 30.6.07 Used -8,900
• -Losses of 2005 are carried forward against
  future Schedule D Case I profits (of the same
  trade).
• -Charges on income are deducted against total
  income of the year in which they are incurred.
• - Non-trade charges not relieved are lost (can
  not be deducted from any income)

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SECTION 393A(1)(a) RELIEF against total profits
of same CAP

• Under Sect 393A(1)(a) a claim may be made so that
  trading losses of a CAP can be used to relieve
  total profits of the same CAP.
• Deducted before deducting all Charges on Income
  
• All or nothing claim- losses used to maximum
  extent
• Claim must be made or S 393(1) will apply
• Any losses still unrelieved are carried forward
  as S 393(1) losses or a claim is made under S
  393A(1)(b).. see next slide

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SECTION 393A(1)(b) RELIEF against total profits
of previous 12 months

• A further claim may be made so that any remaining
  trading losses of a CAP can be used to relieve
  total profits of the previous twelve months
• Total profits means (after deducting trade
  charges) but before deducting non-trade charges.
  As there are effectively no longer any trade
  charges this is the same as S393A(1)(a) ie
  before deducting charges
• Before losses can be carried back a claim against
  the current CAP must be madeunder S393A(1)(a)
• Any losses still unrelieved are carried forward
  as S 393(1) losses.

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SECTION 393A(1)(a) and (b) RELIEFEXAMPLE

• A company has the following results in recent
  years. y/e y/e
  y/e y/e 31/7/04
  31/7/05 31/7/06 31/7/07
  
  Trading profit/(loss) 12,500 10,700
  (36,700) 5,800Income from property 3,300
  3,800 4,200 5,200Non-trade
  charges 2,000 2,000 2,000
  2,000

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CORPORATION
TAX COMPUTATIONS 12 months to 2004
2005 2006 2007 31 July
Loss
Loss
Memo Memo

Schedule
D case I 12,500 10,700 (36,700)
Nil 5,800S 393(1) losses
(18,000) Used 5,800
(5,800) 0Sch A
3,300 3,800
4,200 5,200 S 393A(1)
relief (1) 4,200 (4,200)
. .
. 15,800 14,500 0
5,200 S 393A(1) relief (2) N/a
(14,500 14,500 Non-trade charges
2,000 Not used Not used
(2,000) Chargeable profits 13,800 0 0
3,200 Losses carried forward
(18,000) (12,200)

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NOTESIn the 2006 computation S 393A(1)(a)
claim made, before all Charges, to the maximum
extent, leaving surplus Charges on
income.(2,000) Trade charges could be carried
forward (there arent any), non-trade charges are
left unrelieved. Carry back of losses to 2005
S 393A(1) (b), to the maximum extent but after
deduction of trade charges (there arent any).
Non-trade charges remain unrelieved. Remaining
unrelieved trading losses are carried forward
under S 393(1).
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CEASING TO TRADE

• From earlier
• (d) Where the loss arises in the 12 months
  immediately preceding cessation of trade, the 12
  month carry back period is extended to 36 months.
• For a continuing business Trade charges-
  (formerly royalty payments) -carry forward to
  deduct against future trading profits merged
  with S393(1) losses
• On cessation unrelieved non-trade charges are
  lost (unrelieved trade charges used to be carried
  back)

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CEASING TO TRADEExample

• Deadbeat Ltd made its Accounts up to 31 December
  each year and ceased trading on 31 December 2006.
  Recent results were
• Years ended 31 December
• 2003 2004 2005 2006
• Schedule D Case 1 50,000 60,000 54,000 (120,000)
• Non-trade charges 340 340 340
  160
• Show the profits chargeable to CT for all years
  after relief for the loss.

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CEASING TO TRADESolution

• Years ended 31 December
• 2003 2004 2005 2006
• Schedule D Case 1 50,000 60,000 54,000 (120,000)
• S 393A carry back 6,000 60,000 54,000
• 44,000 0 0
• Non-trade charges 340
• 43,660
• Unrelieved non-trade charges 340
  340 160

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THE CHOICE BETWEEN RELIEFS

• In making the choice consider
• The rate at which relief will be obtained
• (i) Full rate (FY 05 and FY 06 - 30)
• (ii) Small companies rate (FY 05 and FY 06 - 19)
• (iii) Start-up rate (FY 2005 only, 0 )
• (iv) If marginal relief applies FY 2005
• FY 2005
  FY 2006 10,000 - 50,000
  23.75 Not
  applicable300,000 - 1.5m 32.75
  300,000 - 1.5m 32.75
• How quickly relief will be obtained (393A(1) is
  quicker than 393(1))
• The extent to which non-trade charges may be lost
• Will there be future profits?

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THE CHOICE BETWEEN RELIEFSExample

• XY Ltd had these results
• Years ended 31 March
• 2004 2005 2006 2007
• Schedule D Case 1/(loss) 20,000 (1,000,000)
  160,000 160,000
• Chargeable gains 17,000 728,000
  0 0
• Non-trade charges 20,000 20,000
  20,000 20,000
• 1. Recommend appropriate loss claims
• 2. Compute the CT payable for each year based on
  your recommendations (Assume 2006 tax rates apply
  to future years)

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THE CHOICE BETWEEN RELIEFSExample

• XY Ltd CT without loss relief
• Years ended 31 March
• 2004 2005 2006 2007
• PCTCT
  17,000 708,000
  140,000 140,000CT 10,000 _at_ 0
  0 7,000 _at_ 23.75 1,625 1,625
  (avg rate 9.5) 300,000_at_ 19
  57,000 408,000_at_ 32.75 133,620
  190,620 (avg rate 26.9)
  140,000_at_19
  26,600 26,600

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THE CHOICE BETWEEN RELIEFSSolution

• Alternatives
• 1. S 393(1) Offset against future trading profits
  (assume future years continue as 2006). Relief
  will be obtained for 1m loss over next 6.25yrs
  (1,000,000/160,000). Non-trade charges of 20,000
  for 5 yrs will be lost.This will save tax _at_ 19
  
• Tax saving 1m _at_19
  190,000 Lost 6x 20,000 _at_ 19
  (22,800) Total
  167,200

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THE CHOICE BETWEEN RELIEFSSolution

• 2. S393A(1)(a) claim for year to 31 March 2005
  will save tax
• Partly in the Marginal Relief Band and
• Partly at Small companies rate Overall saving
  tax at 26.9 but
• Will lose non-trade charges for 2006 (20,000)
• Carry forward balance under S 393(1)Tax saving
  2005 (on 728,000)
  190,620Balance of loss 272,000 _at_ 19
  51,680Lost non-trade charges for
  05 20,000 _at_19 (3,800)Total
  
  238,520

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THE CHOICE BETWEEN RELIEFSSolution

• 3. S393A(1)(b) carry back claim. In conjunction
  with S 393A(1)(a) and carry forward balance
  under S 393(1)
• Tax saving 2005
  190,620 (as above)
  2004
  1,625 (as above)Loss utilised 2005
  728,000 2004 20,000 17,000
  37,000Balance of loss to carry forward
  1,000,000 - (728,000 37,000) 235,000 This
  will give relief _at_ 19
  44,650Non-trade charges lost 20,000 for
  2006 _at_ 19 (3,800) Total
  
  233,095

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THE CHOICE BETWEEN RELIEFSSolution

• CONCLUSION
• MAKE S393A(1)(a) claim for year 2005 saving tax
  at highest rate but not S 393A(1)(b) for 2003
  (avoids tax at lowest rate)
• Balance after S393A(1)(a) carry forward under
  S393(1) saving tax at the middle rate

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THE CHOICE BETWEEN RELIEFSSolution -
Computations

• Years ended 31 March
• 2004 2005 2006 2007
• Schedule D Case I 20,000 0 160,000
  160,000
• LessS393(1) relief 0 0 (160,000)
  (112,000)
• 20,000 0 0 48,000
• Chargeable gains 17,000 728,000
  0 0
• 37,000 728,000 0 48,000
• Less S393A(1)(a) current 728,000
  
• 37,000 0 0 48,000
• Less non-trade charges 20,000 0
  0 (20,000)
• Chargeable Profits 17,000 0
  0 28,000
• Tax payable 1,625 4,275
• Non-trade charges lost 0
  20,000 20,000 0
• Loss 1m - (728,000 160,000) 112,000

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NON-TRADING LOSSES

• SCHEDULE A -
• first set against non-Schedule A income and gains
  of the company for the CAP any excess is
• carried forward to set off against future income
  of all kinds OR
• available for surrender as group relief.
• NON-TRADING DEFICITS ON LOAN RELATIONSHIPS
• Set against total profits of same accounting
  period
• Carry back 12 months against Schedule D Case III
  profits on non-trading loan relationships.
• Set against non-trading profits of next
  accounting period
• SCHEDULE D CASE VI -
• Losses of a CAP carried forward to set off
  against future Schedule D Case VI income
• CAPITAL LOSSES -
• Net losses of a CAP carried forward to set off
  against future chargeable gains.