Losses, Charges & Group Relief offset CT

Offset of losses, charges and group relief for corporation tax purposes :

This article sets out the position in relation to the offset of charges, losses and group relief following the enactment of Section 90 Finance Act 2001. It also covers the Revenue practice in relation to the tax treatment of losses, charges and group relief.

Section 90 :

Section 90 Finance Act 2001 introduces a provision with effect from 6 March 2001 to restrict the use of trade losses/charges and group relief. Where a company is engaged in an activity which is taxable at the standard rate of corporation tax or at the 10% rate, losses, charges and group relief may only be used against ‘relevant trading income’ i.e. trading income of a company for an accounting period other than trading income which is taxable at the 25% rate.

This rule is subject to the second rule which provides that for the financial years 2001 and 2002, charges and losses incurred in a trade, the income from which is taxable at the 10% corporation tax rate, may be set sideways in the current accounting period, backwards (in the case of losses only) to the previous accounting period or against income of a related company under group relief only against income which is taxable at the 10% rate.

The 1988 and 1992 Finance Acts ring-fenced the sideways and backward offset of losses and charges incurred in a trade which was within the 10% corporation tax regime. Such losses could only be so offset against income taxable at the 10% rate and not against profits taxable at the higher corporation tax rates. However, this ring-fence has not worked satisfactorily in the case of charges and group relief since the introduction in 1999 of a 25% corporation tax rate on non-trading income. The legislation concerned is being amended by this section to ensure that the ring-fence works as intended. The amendment will prevent the offset of “10% losses” of an accounting period against income of the accounting period, or of the previous accounting period, which is taxed at the 25% rate. It will also prevent such losses being offset against income taxed at the 20% rate in 2001 and the 16% rate in 2002. There will be no barrier on their offset against income taxable at the 12½% rate from 2003.

• Unused losses may be carried forward for offset against all trading income of the trade in which the loss was incurred
• Where an accounting period crosses the commencement date viz. 6 March 2001 or 1 January 2003 it is to be divided into two accounting periods, one before the date in question and the other after it.

Example

Prior to introduction of Section 90

Techno Ltd is a distribution company and had the following results for the y/e 6/3/01:

This unutilised loss may be carried back to the year ended 6 March 2000 and set off against the company’s total profits. Alternatively, it may be carried forward for offset against future trading profits of the company.

After application of Section 90

Results for year ended 6/3/02

In accordance with Section 396A and Section 243A, relevant trading losses and relevant trading charges may only be offset against profits from a trade liable to the standard corporation tax rate. They may be carried back (in the case of losses only) to the preceding accounting period and offset against trading profits taxed at the standard corporation tax rate. Alternatively, these unutilised losses may be carried forward for offset against future trading profits.

Results as above with the following addition:

In this case, the unutilised relevant trading losses and relevant trading charges may be offset against the manufacturing profits. The only restriction in relation to manufacturing activities applies to the ability to offset manufacturing losses and manufacturing charges against non-manufacturing profits.

Off-set of charges, losses and group relief incurred up to 5 March 2001 :

Prior to this enactment it had been the practice to allocate charges and losses proportionally across total profit. Each element of profit was proportionately relieved rather than allowing offset of losses, etc. against income chargeable at the highest rate. Although this basis has been generally accepted it is felt that the matter may not be entirely free from doubt and therefore company Returns in respect of losses etc. incurred up to 5 March 2001 which claim offset of these losses against income chargeable at the highest rate will be accepted. (see Note 1.3 on the new CT1 form).

Equally, as non-trade charges are not affected by the ring-fence introduced by Finance Act 2001 in respect of trade charges it is accepted that such charges may be claimed against income chargeable at the highest rate.

This treatment will apply to returns submitted after the publication of the Finance Act 2001 and to cases under enquiry. Liabilities which have been determined in accordance with the previously prevailing practices will not be disturbed.