Are You Accounting for The Relaxation on Corporate Tax Losses?

Are You Accounting for The Relaxation on Corporate Tax Losses?

Reforms Make Tax Relief More Flexible for Businesses

Last year’s reforms of corporate tax losses were released to minimal fanfare, but could deliver real benefits to your business.

2017 will be remembered as the year of Theresa May’s snap election, of debate over Brexit and of Universal Credit rolling slowly but irresistibly across the country. But business owners should also mark it as the year corporate tax reforms were introduced relating to relaxation of losses.

It might not sound as headline-grabbing as those other topics, but according to accountants in Peterborough, it can make all the difference to businesses working hard to survive in these turbulent economic times. So what are these new rules and what benefits do they bring?

Restrictions and relaxations

The Act brought in two new regulations. One was a restriction on the amount of brought forward losses that a company can offset in a given year, and the other was a relaxation that allowed such brought forward losses to be used with greater flexibility.

The first rule is one that is realistically only going to affect large companies and corporate entities, as it sets the ceiling at £5 million of profits per company that can be offset. The second part of the Act, however, is something that applies to businesses of all sizes and can be extremely useful. As such, let’s leave the topic of the restriction at that, and focus on the relaxation.

What are the rules?

Under the terms of the Finance Act, trade losses are now allowed to be carried forward against the total profits of the company, not just profits deriving from the same trade.It is also stipulated that non-trading loan relationship deficits (NTLRDs) can similarly be carried forward against the total company profits, and not just non-trading profits.

There are some carried forward losses that can be made available for group relief. These include trading losses, NTLRDs, management expenses,and non-trading losses relating to intangible fixed assets and other losses.

What’s the catch?

Note that allthese relaxations apply only to losses arising on or after the date that the new rules came into force, which was 01 April 2017. Any losses that arose prior to this date are subject to the previous tax relief rules.

There are also certain conditions that have to be met in order for trade losses sustained after 01 April 2017 trade to be offset against total profits. These include the following:

  • The business has continued to carry on the trade in subsequent accounting periods from the time the losses were incurred to the time they are offset.
  • The transactionwas either commercial or undertaken to fulfil statutory functions as defined in both the period the loss was incurred and the period in which it was offset.
  • The trade has not become negligible.

Even if these conditions are not met, it is still possible to use the old loss relief rules to offset the losses against profits of the same trade. Alternatively, if this is a trade that has ceased, you can claim terminal loss relief.

Despite government attempts to bring simplicity to corporate tax rules, this is still an area that causes plenty of confusion among small businesses, so if in doubt, seek advice from your accountant or tax advisor.

Categories: Business

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