Maximising tax relief on trading losses

Oct 31, 2023 | Tax Tuesday

Earlier this year, there were several changes to the UK’s Corporation Tax rules which saw a number of SMEs become subject to higher rates than before. Under this, the main rate of Corporation Tax increased to 25% (for businesses with a profit over £250,000) whilst the previous 19% rate became the small profits rate (for those with profits of £50,000 or less). Companies with profits between this are now taxed at 25%, but with a marginal relief applied. 

These changes also included the new Associated Company rules which means that the corporation tax thresholds are divided by the number of companies in the group. For example, if you are associated with one other company, then the maximum threshold for the smaller profits rate will be £25,000 and the main rate threshold will be £125,000. 

In some accounting periods, your company may experience a trading loss. There can, however, be a tax-advantaged silver lining to this – if you handle the loss efficiently, you or other companies within the group can receive a relief on corporation tax obligations.

This week, we demonstrate how some strategic tax planning could help you to reduce the tax obligations of other companies in your group, whilst remaining compliant.

What are trading losses?

If your income is less than the allowable expenses made within a financial year, then your company has suffered a trading loss. For Corporation Tax purposes, your trading profit or loss is determined by making the usual tax adjustments to the figure shown in your financial accounts. When calculating the value, you should:

  • include any capital allowances
  • include any balancing charges
  • not include any losses or gains that might be made on the sale or disposal of assets
  • include certain annuities and charitable donations.

Corporation tax relief on trading losses

You can get tax relief by offsetting the loss against the other gains or profits of your business in the same accounting period – by carrying the loss back to a previous period or by carrying it forward to another accounting period.

Alternatively, if your company is in a group relationship with one or more other companies (associated companies), then you can choose to offset your trading losses against the profits made by other members within the group, rather than carrying it forwards or backwards. 

How can I use my company’s loss to maximise corporation tax relief for other companies in the group?

Let’s say that your company (A) is associated with three others (B, C, and D) in a group relationship. The first thing we should consider is that the corporation tax thresholds are divided by the number of companies within your group, which is four. Therefore, the maximum threshold for the small profits rate is £12,500 and the main rate threshold is £62,500.

For simplicity, we’ll say that Company A had a loss of £65,000, Company B had a profit of £75,000, Company C had a profit of £10,000; and Company D had a profit of £11,500. In this case, we can ignore Companies C and D, as their Corporation Tax obligation is the lowest possible, at 19%. Company B, however, is above the 25% threshold. Bearing this in mind, it would make sense to offset Company A’s £65,000 loss against the £75,000 profit from Company B. By doing this, you will be able to bring Company B’s profit to £10,000, meaning that it will be taxed at the small profits rate. 

While this may seem like an unfair advantage for group companies, single entities are instead able to offset their losses against their profits in future accounting periods, to increase the relief they’ll be entitled to.

Offsetting your trading losses in this way requires careful consideration and tax planning, so that you can avoid mistakes and ensure that your company remains compliant.