First, it is necessary to establish which category of income the losses arise from. If a company has income in several categories, it must keep a separate account for each tax loss.

All losses may, of course, be carried forward for an unlimited period (until the company changes the nature of its business), but they can only be set against income in the same category.

In the particular situation where the business changes ownership, however, these tax losses cannot be carried forward into the period following the change.

A loss arising in a given category within the last 12 months may be set against income in the same category for the 3 years immediately preceding the tax period.

Planning Ahead With Tax Losses in England

Few businesses are profitable from day one. Start-up costs, investment in growth or a difficult trading year can all lead to a tax loss. For a company in England, a loss is not simply a disappointing figure in the accounts. Used correctly, it can reduce the tax payable on profits in other periods, so it is worth understanding the options available.

Types of Loss Matter

The tax treatment of a loss depends on where it arises. Trading losses, losses on property income, capital losses and other categories are each subject to their own rules about how and against what they can be relieved. Capital losses, for example, can generally only be set against capital gains. That is why it is important to identify the nature of each loss accurately and keep a clear record of losses available for future use.

Ways a Loss Can Be Used

Depending on the type of loss and the company’s circumstances, relief may be available in different ways, for example:

  • Against other profits of the same accounting period
  • By carrying the loss back against profits of an earlier period, where permitted
  • By carrying it forward against future profits
  • By surrendering it to another company in the same group, where group relief applies

Each option has conditions and time limits, and some claims must be made formally. The rules have been revised over the years, so an approach that worked in the past may not be the best one today.

Restrictions to Be Aware Of

There are anti-avoidance rules that can restrict the use of losses, particularly where there is a change in the ownership of a company combined with a significant change in the nature or conduct of its business. Large companies may also be subject to limits on how much of their profits can be covered by brought-forward losses. Anyone buying or restructuring a company with historic losses should take advice before the transaction.

Making the Right Choice

The most beneficial way to use a loss depends on expected future profits, cash flow and the tax rates applying to different periods.

If your English company has made a loss, contact eTuls. Our accountants can review your position and help you claim relief in the most effective way.