View the related Tax Guidance about Corporate trading losses
Corporate trading losses ― overview
Corporate trading losses ― overviewCompany trading losses are computed in the same way as trading profits. Where the adjusted trading profit figure is a loss, the trade profit assessment in the corporation tax computation will be nil. This guidance note gives an overview of the different options for relieving company trading losses. Companies may have different options for relieving trading losses and it is important to consider the best utilisation of losses in light of the company’s commercial objectives and in choosing the option that gives the most tax efficient result. For more information on this, see the Loss planning guidance note.Summary of reliefs for trading lossesTrading losses may be relieved in the following ways:ReliefNotesGuidance noteLegislationSet against total profits in current accounting periodRelief before qualifying charitable donations.Claim requiredCurrent year relief and carry back lossesCTA 2010, s 37(3)(a)Carried back against total profits in the preceding 12 months (extended to 36 months for accounting periods ending between 1 April 2020 and 31 March 2022)Relief before qualifying charitable donations.Claim requiredCurrent year relief and carry back
Property investment or trading?
Property investment or trading?Outline of property investment vs tradingThis guidance note applies to both individuals and companies.The distinction between income and capital profits is crucial to many areas of tax law and is a common issue for property transactions. Often it will be quite clear cut as to whether the activity is trading or investing in land. A person buying property to let out long term will be making a property investment, whereas someone buying a property to refurbish and sell (’flipping’) will most likely be trading as a property dealer or property developer. However, where is the line to be drawn between activity regarded as dealing and activity regarded as investment?First, it is important to realise that the tests for whether one is dealing in property or making a property investment are the same as for any other trade. Therefore, a good place to start is to look at the ‘badges of trade’ and considerations will include:•profit seeking motive•frequency and number of similar transactions•modification of the asset in order to make it more saleable•nature of the asset•connection with an existing trade•financing arrangements•length of ownership•the existence of a sales organisation•the reason for the acquisition or saleThe badges of trade are not a statutory concept but are a recognised set of criteria developed by the courts to identify when a person is undertaking a trading activity. They can be applied to property transactions just as they can to a variety of
Transactions in UK land
Transactions in UK landThe rules on taxing the profits of dealing in and developing UK land introduced by FA 2016 replace the previous legislation on transactions in land. The rules are widely drafted and catch all persons undertaking transactions in UK land and property, whether resident in the UK or resident outside the UK. The rules apply to profits recognised in the accounts on or after 8 March 2017, regardless of the date of the contract, ie even if the contract was entered into prior to 5 July 2016 (the date upon which the legislation came into force).This guidance note covers the latest rules as they apply for corporation tax purposes. The pre-2016 rules for corporation tax are covered in Simon’s Taxes at B5.235 onwards.Similar provisions apply for income tax as explained in the Transactions in UK land ― individuals guidance note. HMRC has confirmed that it is not the purpose of the rules to alter the treatment of the activity if it is clearly investment. Transactions such as buying or repairing a property to generate rental income and to enjoy capital appreciation are not likely to be treated as trading activity under the transactions in UK land provisions. Introduction to the current regimeEven with the rate of corporation tax being the same on income and gains, the relevance of these rules is:•foreign companies, or their permanent establishments (PEs) in the UK (and in some cases those even falling short of being a PE using double tax treaties) which
Research and development SME tax reliefs
Research and development SME tax reliefsThis guidance note provides information on the R&D reliefs available specifically to companies which are small and medium sized enterprises (SMEs). The definition of an SME is detailed in the Research and development (R&D) relief ― overview guidance note. The Qualifying expenditure for R&D tax relief guidance note provides information on what expenditure qualifies for SME relief.See also Simon’s Taxes D1.419, D1.420.For accounting periods beginning on or after 1 April 2024, SMEs can claim relief for qualifying R&D expenditure under the merged RDEC scheme. See the Research and development expenditure credit (RDEC) guidance note. Only loss making SMEs which meet an R&D intensity condition can claim the more generous SME reliefs described in this guidance note. This is sometimes referred to as the ‘SME intensive scheme’ or ‘ERIS’ (enhanced R&D intensive support).For accounting periods beginning before 1 April 2024, SMEs can claim RDEC only for contracted out, subsidised or capped expenditure by SMEs that does not qualify for the SME scheme. Otherwise, SMEs can only claim for relief under the SME scheme, whether or not the company is loss making or R&D intensive.R&D intensive SMEsA company meets the R&D intensity condition for an accounting period if its R&D expenditure is at least 30% of its total expenditure for the period. If the company is connected with any other companies, the test is applied to the expenditure of all of the connected companies. Where the claimant company’s accounting period does not fully coincide with that
Corporate interest restriction ― overview
Corporate interest restriction ― overviewThe corporate interest restriction (CIR) essentially limits the amount of interest expense a company can deduct from its taxable profits if the UK aggregate net interest expense of the worldwide group to which it belongs is over £2 million. The actual mechanics of the CIR calculation are highly complex (the legislation is over 150 pages long) and are detailed below. Before looking at the detail of the rules, it is important to note that there are a few points that are specific to the CIR regime, as follows:•the rules operate in relation to the worldwide group and by reference to the period of account (PoA) of the group for which the consolidated financial statements are prepared. A worldwide group usually refers to an ultimate parent and each of its consolidated subsidiaries, although it is possible to have a single-company worldwide group•the CIR works on a group rather than a company-by-company basis which is different to most taxing provisions. What this means is that most calculations required by the rules are carried out at the group level with any interest restrictions etc being made afterwards to individual companiesThe CIR applies to ‘tax interest expense’. This is the legislative phrase used to encompass a wide range of interest and interest-like transactions such as:•most loan relationship debits•some derivative contract debits•the finance cost element of certain arrangements or transactions involving finance leasing, debt factoring or service concession arrangementsTIOPA 2010, s 382For simplicity, when the
Farming ― restriction of losses for hobby farming
Farming ― restriction of losses for hobby farmingThis guidance note sets out the specific tax rules which determine whether a farm enterprise is treated as a commercial business or a hobby activity. One rule looks at the commercial basis of the farm and the other reviews situations where the farming activity has incurred losses for several successive years. The impact of being treated as a hobby farm is to restrict the use of losses. They prevent farming trade losses from being relieved against other income (or in some cases capital gains) of the same, or previous tax year, commonly referred to as sideways loss relief. The rules apply for both unincorporated businesses and companies. The legislation is set out in ITA 2007, ss 66–70 and CTA 2010, ss 44, 48–49 and HMRC guidance is at BIM85615, CTM04710 and CTM04600.Further details can be found in Simon’s Taxes B5.175 and Stanley: Taxation of Farmers and Landowners, 2.93.General commentary on losses can be found in the following guidance notes:•Sole trader losses ― established trades•Sole trader loss relief ― opening years•Relief for partnership losses•Corporate trading losses ― overviewSummary of loss restrictionsFirstly the farmer has to demonstrate that the farm’s activities are carried out on a commercial basis, and with a view to the realisation of profits. If not, loss relief against general income for individuals or total profits for companies is denied. Next farming has its own set of ‘hobby farming rules’, which state that a profit must be
Corporate interest restriction ― carry-forward amounts
Corporate interest restriction ― carry-forward amountsWhat can be carried forward under the CIR rules?Companies may experience variations in business profits and market interest rates. Changes in capital structure that impact the level of debt on the balance sheet may also occur from time to time. These and other sources of volatility could result in interest disallowances in some periods and unused interest allowances in other periods.To provide a greater element of fairness in the corporate interest restriction (CIR) rules, there are a number of carry-forward provisions:Tax attributeOwnershipCarry-forward periodStatutory referenceTax-interest disallowedCompanyIndefinite carry forwardTIOPA 2010, s 378Unused interest allowanceWorldwide groupFive yearsTIOPA 2010, ss 392–395AExcess debt capWorldwide groupNext period of account (PoA)TIOPA 2010, ss 400(3)–(7), 400AAs detailed in the table above, the tax attributes can belong to either the group as a whole or to an individual company. This distinction in ownership of these attributes is important.Where the tax attribute belongs to the worldwide group, then any change to the ultimate parent will result in the loss of those tax attributes at that point, other than where, for reorganisations, a new holding company is inserted between an existing ultimate parent company and its shareholders. (Where the group retains the same ultimate parent following a transaction, other changes to the composition of the group are ignored, ie the worldwide group is treated as the same group.) This applies in the case of all attributes except tax-interest disallowance, which belongs to the individual
Companies in partnership
Companies in partnershipThis guidance note gives an overview of the basic rules relating to the preparation of tax computations and returns for corporate partners and summarises key anti-avoidance legislation relevant to corporate members of partnerships with links to further content. The reasons why it may be beneficial to introduce a corporate member are detailed in the Introducing corporate partners guidance note.For general information on the computation of profits, losses, capital gains and the allocation of profits and losses for partnerships see the following guidance notes:•Trading profits of a partnership •Capital allowances for partnerships•Allocation of partnership profit or loss•Taxation of partnership trading profits•Relief for partnership losses•Capital gains of a partnershipFor HMRC guidance on companies in partnership, see PM210000 onwards and CTM36500 onwards.Computation of taxable profits for corporate partnersGeneral partnerships, Scottish partnerships, limited partnerships and LLPs are transparent for UK tax purposes regardless of whether they have any corporate partners / members. Computing the amount of taxable profits from a partnership is therefore very similar for companies as it is for individuals. For more information on different types of partnership, see the Partnerships - overview guidance note.When a partnership includes a mixture of corporate and individual members, two computations of taxable profits must be carried out; one under the rules relating to individuals and the other according to rules relating to corporation tax.Once the amount of profits or losses has been computed, the amounts are included in the companies’ corporation tax computation. Losses can be
Corporate capital gains ― overview
Corporate capital gains ― overviewThis guidance note sets out an overview of the tax treatment of chargeable gains made by a company. For an overview of capital gains tax generally, see the Introduction to capital gains tax guidance note.Chargeable gains are included as part of the taxable total profits (TTP) of a company, see the Taxable Total Profits (TTP) guidance note for further details.Further details of the calculation of corporate capital gains are set out in the Calculation of corporate capital gains guidance note.The Tolley Corporate capital gains ― toolkit pulls together various functional content resources that are relevant when advising on corporate capital gains.Scope of chargeA company is liable to corporation tax in respect of its chargeable gains. The total chargeable gains arising in an accounting period, after deducting allowable capital losses arising in the period or carried forward from previous periods, are included as part of the company’s taxable total profits and taxed at the rate of corporation tax in force for the relevant financial year. See the Computation of corporation tax guidance note for details of the latest rates and details of the restriction of capital losses which may apply when total losses are above the £5 million allowance. A chargeable gain or allowable loss may arise when a company disposes of an asset by way of sale, gift or in any other manner. The receipt of a capital sum in respect of compensation for the damage or destruction of a company asset may also give
Relief for partnership losses
Relief for partnership lossesCalculation of partnership lossesThis guidance note sets out what relief is available for trading losses incurred by the partners in a partnership.Partnership trading losses are computed in the same way as profits, see the Trading profits of a partnership guidance note. Once the partnership loss has been computed, it is allocated between the partners in accordance with the profit sharing ratios for that accounting period see the Allocation of partnership profit or loss guidance note. If the partnership makes a loss, once the loss has been allocated, each partner is then able to claim loss relief based on their own personal circumstances. There is no concept of a ‘partnership loss’. The loss belongs to the partners and loss relief claims are made individually.For partnerships continuing in business, and partners continuing in partnership year after year, losses are relieved in accordance with the relevant income or corporation tax loss relief rules (depending on whether the partner is a corporate partner or not). There is specific anti-avoidance legislation which restrict the relief for trading losses against other income as detailed in the Restriction on sideways loss relief for partners guidance note.What loss reliefs are available?Broadly, losses allocated to the relevant partners may be relieved against the following:•net income (total profit for corporate partners including chargeable gains) of the year of loss or the preceding year•current year capital gains (for individual partners), to the extent that losses cannot be relieved against current or prior year net
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