A guide to Corporation Tax trading losses for business owners

While a trading loss is never good news for any business, it’s important to use that loss efficiently to reduce the tax bill you may have paid in earlier years. If you are an early-stage business in your first three years of operation, you may also use the losses incurred before you started to trade to offset any initial trading profits.

In this article we explain the options available to your business for offsetting Corporation Tax trading losses and outline the changes to the process announced by the Chancellor in response to the problems caused by the pandemic.

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 investment allowance in 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 could also carry forward the trading loss and set this against total profits of a later period.

Note: There is a temporary two-year change to these options, which we will explain in the next section.

Current accounting period

This option would be useful if you have non-trading income that forms part of your total profits. For example, you might have recently started your business and still receive a salary or other income from your previous employment 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.

Temporary extension to the carry-back period

In the Spring 2021 Budget, the Chancellor made temporary changes to the carry-back period in response to the cash flow and trading problems experienced by businesses during the pandemic.

The major change is that for a temporary period of two years, Corporation Tax trading losses can be carried back as relief on profits made in any of the previous 3 years.

This temporary facility applies to trading losses incurred during accounting periods that end between 1st April 2020 and 31st March 2022.

This means that you can carry back unused trading losses up to a limit of £2 million against profits made in the previous 3 years.

You must start with claims against any profits in the most recent 12-month period. If you still have unused losses, you can carry them back to the next two 12-month periods.

EXAMPLE

• You have made a loss of £20,000 in your current accounting period.

• You made a profit of £12,000 in the previous 12-month period.

• You can offset the entire profit of £12,000, leaving an unused loss of £8,000.

• You made a profit of £5000 in the next 12-month period.

• You can offset the entire profit of £5000, leaving an unused loss of £3,000.

• You made a profit of £7,000 in the last of the 3 earlier 12-month periods.

• You can offset £3,000 against the profit of £7,000, reducing your Corporation Tax liability for that period to £4,000.

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.

That pre-trading expenditure can be incurred at any time during the 7 years prior to the date you started trading.

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.

• You can claim losses of £8,000 as relief against the profit in your second year, reducing your Corporation Tax liability to £3,000 for that 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 you run a larger business with profits between £50,000 and £250,000, you will be liable to a higher rate of Corporation Tax from April 2023. The rate increases from 19 percent to 25 percent, so it may be worth retaining and carrying forward your losses so that you gain relief at the higher rate of 25 percent.

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.