Losses can sometimes be used to reduce the corporation tax bill. However, their use is subject to strict rules, to prevent tax evasion.
Trading losses can be offset against other profits made in the same accounting period
- Trading losses can also be carried back against profits made in the preceding accounting period. To do this you must make a separate claim to HMRC when you submit your corporation tax return.
- Alternatively, they can be carried forward and set off against future profits from the same trade. This is registered automatically when you submit your tax return so you don’t need to submit a separate claim.
- They cannot be carried forward if the company changes hands and there is a major change in the business. So there is no point in buying or selling companies purely for the sake of their tax losses.
- From April 2017, the amount of profit that can be offset by losses carried forward is limited to 50% for profits above £5m.
Other companies within the same group may be able to make use of a company’s trading losses
- To qualify, at least 75% of the shares must be owned by the parent company.
- There are other restrictions. For example, when a company joins or leaves the group.
Capital losses can only be offset against capital gains
- They cannot be offset against trading income.
- However, they can be carried forward indefinitely, so they should always be recorded, even if they cannot be used immediately.