background image
7.1.1. Loss Carry-Forward

Trade losses can be carried forward indefinitely, and can be set off against all non trading profits.  However, losses of a particular trade can be carried forward only against profit of the same trade. Whether the same trade is being carried on in subsequent accounting periods is largely a question of fact and a number of case law exists on this principle. Effective 1 April 2015, the utilization of loss carry forwards by banks is limited to 50% of annual profits. The restriction  applies to carried-forward trading losses, non-trading loan relationship deficits, and management expenses.  For example, in the case of Kawthar Consulting Ltd before the Special Commissioners', the  company's activities had changed a number of times from 1984 to 2001, and from 1987 to 1990 was mainly concerned with a large project from a single client.  This client went into administration in 1990, and in 1997, the company’s turnover flagged that another major contract had been secured, where a group company was responsible for providing the software.  The company wanted to carry forward the losses arising from the earlier years to the 1998 accounting period as it maintained that it had carried out the trade as “IT Consultancy” throughout.  It was held that the changes prior to 1997 were organic developments in the nature of the activities over the years and did not amount to a change in the trade of providing computer systems.  There was however, a change in the trade post 1997 as (i) the involvement of another group company constituted a major change in the manner the company was carrying on its trading activities, and (ii) there had been an overall change in emphasis of activities towards consultancy services, as opposed to providing computer software.

In another case, Rolls-Royce Motors Ltd which was run as six divisions, encountered financial problems.  The recovery plan set out that the assets and undertakings of four of the divisions were transferred to a Government owned company, with the remaining two being transferred to a subsidiary of the original company. It was held that the subsidiary was not carrying on the same trade as the company before the transfer (as four of the six divisions were now in Government ownership) and therefore losses incurred before the transfer could not be offset against subsequent profits.

Effective 1 April 2017, the government introduced reform measures in respect of corporate tax losses. The key measures include:

  • Expanding the scope of ‘profits’ that can be offset against brought forward losses incurred after 1 April 2017; and
  • Utilization of brought forward losses, in relation to profits incurred after 1 April 2017, be restricted to 50% of profits per year in excess of an annual allowance of up to GBP 5 million

Further, companies are now allowed to surrender carried forward corporation tax losses, subject to certain conditions, in relation to accounting periods beginning on or after 1 April 2017. A Group may nominate a particular company to make claims and surrenders of group relief for carried-forward losses on behalf of other group companies in the same way as for current-year losses.