Jennifer Adams looks at the effect the coronavirus is having on some closed businesses.
The coronavirus lockdown has caused serious financial distress for many businesses. Unfortunately, some of those businesses that closed will never open again.
Terminal loss relief
Companies ceasing to trade and having losses in the final 12 months can generally claim terminal loss relief and obtain a refund of any corporation tax paid or deduction from any tax due.
Under this relief, losses are carried back up to three years prior to the date of cessation and offset against total profits of previous accounting periods on a ‘last in first out’ basis (i.e. the loss is carried back to the first accounting period before the loss-making period, then to the period before that and so on).
Relief is granted subject to various conditions, not least of which is that the company must have been carrying on the same trade wholly within the UK.
How the relief works
Usually, trading losses are first deducted from any profits incurred on any other income for an accounting period (e.g. rental profits); this is termed ‘sideways relief’. If full relief is not possible using this method, in the final accounting period a claim for terminal loss relief should be considered. Unfortunately, it is one or the other; they cannot be used in combination although reduced capital allowances claims might increase the terminal loss relief available.
Invariably, the accounting period in which a company ceases to trade will be less than 12 months. Should any losses have also been incurred in the penultimate year, the loss is apportioned on a time basis to establish the losses for the final 12 months. A proportion of such losses will therefore be eligible for the relief. Any balance unused can either be allowed ‘sideways relief’ or carried back one year under the normal loss relieving rules.
If the accounting period end date has changed, or any of the earlier accounting periods in that three-year period are less than 12 months, the profit will need to be accordingly apportioned in the calculation.
Example: Loss periods
A company whose year-end was 30 April ceased trading on 30 June 2020.
The tax loss relief period is therefore the last 12 months (365 days) of trading:
304/366 of the period 1 May 2019 to 30 April 2020 plus
61/61 of the period 1 May 2020 to 30 June 2020
Terminal losses can be carried back to accounting periods ending within the months 1 May 2015 to 30 April 2019.
Anti-avoidance
Restrictions are in force, such that terminal loss relief cannot apply should:
- The trade ceased on being transferred to a company (or other person) not within the charge to corporation tax;
- The trade ceased on being transferred to a company (or other person) within the charge to corporation tax under common 75% ownership;
- The company ceasing to trade as part of a scheme or arrangement the main purposeof which is to secure a terminal loss relief claim.
There is also a relief that compliments terminal loss relief by the bringing forward of losses to reduce profits:
- of the final accounting period;
-
for earlier periods up to the three years before the end of the final accounting period.
This relief differs from terminal loss relief, which applies for losses that occur in the final 12 months of the company only.
Practical tip
Terminal loss relief needs to be claimed (usually on the final tax return) within two years of the end of the accounting period of the loss being made.
Relief for carried-forward trade losses must be made within two years of the end of the accounting period in which trading stopped.
