Corporation Tax

4. Losses

Losses can sometimes be used to reduce the corporation tax bill. However, their use is subject to strict rules, to prevent tax evasion.

4.1 Trading losses can be offset against any other profits (including capital gains) made in the same accounting period.

• They can also be carried back against profits made in the preceding accounting period.
• Alternatively, they can be carried forward and set off against future profits from the same trade.
• But 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.

4.2 It may be possible for other companies within the same group to make use of a company's trading losses.

• To qualify, at least 75 per cent of the shares must be owned by the parent company.
• There are other restrictions. For example, when a company joins or leaves the group.

4.3 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.Take the example of a company which makes a loss of £20,000 on the sale of an asset in one year, cannot use the loss for three years, but then makes a profit of £30,000 on the sale of a lease. The capital loss can be offset against the later gain to reduce it to £10,000 for tax purposes.