Chapter 2: Trade losses
Overview
157.This Chapter deals with relief for trading losses.
Section 36: Introduction to Chapter
158.This section provides an overview of the Chapter and also includes provision about the meaning of references to “trade” and “carrying on a trade” . In particular it carries forward the effect of sections 6(4)(b) and 834(2) of ICTA in providing that a “trade” includes an office. It is based on sections 6(4), 393(10), 393A(9) and 834(2) of ICTA.
Section 37: Relief for trade losses against total profits
159.This section explains how a loss in a trade may be relieved against total profits of the same or earlier periods. It is based on sections 6(4), 393A(1), (2), (3), (10) and 834(2) of ICTA.
160.Subsection (3)(b) establishes that a loss in trade may be carried back to the twelve month period prior to the accounting period in which the loss arose. The exceptions to this rule, where the carry–back period is extended, are set out in sections 39 to 42. These exceptions affect companies either rarely or not at all.
161.Subsection (4) deals with the order of set-off of losses claimed under subsection(3). Such losses must first be set against total profits of the loss making period before, if the claim so requires, being carried back to earlier periods. Where it is possible to carry a loss back for more than one period (see sections 39 to 42) then the loss must be set against total profits of the most recent period before the balance of the loss can be carried back to the period preceding that period and so on.
162.Subsections (5) and (6) prohibit the carry back of losses from what used to be Case V trades but what are now referred to as trades “carried on wholly outside the United Kingdom”. The courts established that a Case V trade was one that was carried on wholly outside the United Kingdom.
163.Ogilvie v Kitton (Surveyor of Taxes) (1908), 5 TC 338,Court of Exchequer (Scotland) determined that where a trade is “carried on” depends not only on the location of the day-to-day transactions of the trade but also on where the management and control of the company takes place. In the case of a company where the directors are responsible for management and control and that management and control function is exercised in the United Kingdom it is very unlikely that the company has a trade “carried on wholly outside the United Kingdom”.
164.There is, however, one situation where a company managed and controlled in the United Kingdom may have a trade carried on wholly outside the United Kingdom. That is where the company is a partner in a partnership and the business of the partnership is managed and controlled abroad. By using the words “carried on” in the section the link with existing case law has been maintained.
165.Subsection (7) sets out the time limits for making a claim. The time limit may be extended by an officer of Revenue and Customs. See Change 5 in Annex 1.
166.Subsection (9) provides that relief is subject to restriction or modification in accordance with provisions of the Corporation Tax Acts. Examples of such restrictions or modifications are to be found in:
the rest of the Chapter;
Chapter 3 of this Part (relief for losses in cases involving limited partnerships and limited liability partnerships);
Section 304(relief for losses in relation to oil activities);
Section 944 (modified application of Chapter 2 of Part 4 in relation to transfers of trade without a change in ownership); and
Chapter 3 of Part 22 (relief for losses if company is a member of a partnership and certain arrangements for transferring relief are in place).
167.Subsection (2D) of section 393A has not been rewritten. The subsection was a signpost to section 393B where certain provisions relating to losses arising in a ring fence trade applied. The structure of the rewritten section makes such a signpost unnecessary.
168.Subsections (7), (7A) and (8) of section 393A have not been rewritten. These subsections dealt with excess trade charges. It is no longer possible for trade charges to arise and these subsections were therefore redundant.
169.The definition of charges in section 338A of ICTA was limited to qualifying donations to charity. To be added to trade losses (section 393(9) of ICTA) the charges must have beenpayments made wholly and exclusively for the purposes of the trade. Section 338A(3) stipulated that no payment that was deductible in computing profits should be treated as a charge. If a payment was made wholly and exclusively for the purposes of the trade it would be allowable as a deduction in computing profits. Hence, it could not be a charge.
Section 38: Limit on deduction if accounting period falls partly within 12 month period
170.Where a loss is being relieved against the profits of an earlier accounting period this section limits the relief available if that period falls partly within the twelve month period prior to the loss-making period. It is based on section 393A(2) of ICTA.
171.The effect of this section can be illustrated as follows:
Example
| Accounting period 3 | 12m | 01/01/11 to 31/12/11 | Loss in trade | £24,000 |
| Accounting period 2 | 8m | 01/05/10 to 31/12/10 | Total profits | £12,000 |
| Accounting period 1 | 12m | 01/05/09 to 30/04/10 | Total profits | £15,000 |
The twelve month period prior to the loss making period is 01/01/10 to 31/12/10. Accounting period 2 falls wholly within this period and the loss in trade is sufficient to cover all of the total profits of this period. £12,000 of the loss in trade remains to be relieved. The proportion of Accounting period 1 that falls within the relevant twelve month period is 4/12. 4/12 of the total profits of Accounting period 1 is £5,000. Accordingly the amount to be deducted under section 37(3) cannot exceed £5,000. This means that £7,000 of the loss in trade arising in Accounting period 3 cannot be relieved under section 37.
Section 39: Terminal losses: extension of periods for which relief may be given
172.This section extends the length of the period referred to in section 37(3)(b) when a company ceases to trade and makes a terminal loss. It is based on section 393A(2A) and (2B) of ICTA.
173.The entitlement to make a claim remains an entitlement under section 37. If a loss has already been fully utilised under that section there is no possibility of relieving that loss again by virtue of the fact that it is a terminal loss within section 39.
Section 40: Ring fence trades: extension of periods for which relief may be given
174.This section extends the length of the period referred to in section 37(3)(b) when a company makes a loss in a ring fence trade and certain conditions are met. It is based on section 393A(2A), (2C) and (12) of ICTA.
175.The definition of a “ring fence trade” is to be found in section 162 of CAA. Broadly, such a trade is one concerned with oil extraction activities.
176.Subsection (1)(b) provides that in the loss-making period the company must have received an allowance under section 164 of CAA. Such an allowance is given in relation to expenditure incurred on the decommissioning of plant or machinery used in a ring fence trade.
Section 41: Sections 39 and 40: transfers of trade to obtain relief
177.This section prevents the transfer of terminal losses in certain circumstances. It is an anti-avoidance provision. It is based on section 393A(2E) of ICTA.
Section 42: Ring fence trades: further extension of period for relief
178.This section extends the period of relief for ring fence trades in certain circumstances. It is based on section 393B of ICTA.
179.For the section to apply a claim must have been made under section 39 (terminal losses: extension of periods for which relief may be given) or section 40 (ring fence trades: extension of periods for which relief may be given). The normal relief period is therefore already extended from twelve months to three years.
180.If there are insufficient profits in the three year relief period this section allows the unrelieved loss to be carried back to earlier periods.
181.The intention is to provide relief for losses arising as a consequence of incurring expenditure on decommissioning costs.
182.If decommissioning expenditure is incurred and a loss arises after the ring fence trade has ceased then no claim to relief would at first sight appear to be possible. A claim under section 39 would fail as the loss did not arise in an accounting period that commenced in the final twelve months of a company’s trade. A claim under section 40 would fail as the loss did not arise in a ring fence trade (that trade having ceased). But that analysis of section 39 overlooks section 165 of CAA. This treats post-cessation decommissioning expenditure as having been incurred in the chargeable period in which the trader ceased to carry on the trade. As a result a claim under section 39 (terminal losses: extension of periods for which relief may be given) is possible.
Section 43: Claim period in case of ring fence or mineral extraction trades
183.This section extends the time limit for making claims under section 37 where the company has carried on a ring fence trade or a mineral extraction trade and certain conditions are met. It is based on section 393A(11) to (12) of ICTA.
Section 44: Trade must be commercial or carried on for statutory functions
184.This section denies relief in relation to losses arising from trades which are not commercial. It is based on section 393A(3) and (4) of ICTA.
185.Subsection (1) refers to the making of a profit in the trade. “Profit” in this instance, as the context suggests, has its ordinary commercial meaning.
186.Subsection (2) provides for the case where the trade is carried on as part of a larger undertaking. In such a case the larger undertaking (that is, the undertaking as a whole) may be carried on with a view to the realisation of profits even if the trade itself is not.
187.In subsection (4)the reference to an Act includes Acts of the Scottish Parliament. See Change 6 in Annex 1.
Section 45: Carry forward of trade loss against subsequent trade profits
188.This section provides for trade losses which have not been relieved in accordance with section 37 to be carried forward and relieved against future trade profits. It is based on section 393 of ICTA.
189.Subsection (6) provides that relief is subject to restriction or modification in accordance with provisions of the Corporation Tax Acts. Examples of such restrictions or modifications are to be found in:
the rest of the Chapter;
Chapter 7 of this Part (write-off of government investment in a company); and
Chapter 3 of Part 22 (relief for losses if company is a member of a partnership and certain arrangements for transferring relief are in place).
190.Subsection (9) of section 393 has not been rewritten. The subsection dealt with excess trade charges. It is no longer possible for trade charges to arise and this subsection is therefore redundant.
191.The definition of charges in section 338A of ICTA was limited to qualifying donations to charity. To be added to trade losses (section 393(9) of ICTA) the charges must have beenpayments made wholly and exclusively for the purposes of the trade. Section 338A(3) stipulated that no payment that was deductible in computing profits should be treated as a charge. If a payment was made wholly and exclusively for the purposes of the trade it would be allowable as a deduction in computing profits. Hence, it could not be a charge.
Section 46: Use of trade-related interest and dividends if insufficient trade profits
192.This section provides that certain interest and dividends are treated as trade profits if the profits are otherwise insufficient to use some or all of a carry-forward trade loss. It is based on section 393(8) of ICTA.
193.It is only interest and dividends that would otherwise be treated as receipts of the trade that can attract this treatment.
Section 47: Registered industrial and provident societies
194.This section extends the scope of section 45 for registered industrial and provident societies. It is based on ESCC5.
195.The classes of income to which the section applies differ slightly from those in the concession. See Change 7in Annex 1.
Section 48: Farming or market gardening
196.This section restricts, in certain cases, loss relief in respect of losses arising from a trade of farming or market gardening. It is based on section 397(2) to (8) of ICTA.
197.It is the first of a group of sections (sections 48 to 51) which deal with the potential restriction of losses where the losses arise in respect of a trade of farming or market gardening. It establishes the basic rule. None of these sections applies to trades other than farming or market gardening.
198.Subsection (2) sets out the circumstances in which loss relief is restricted. Broadly, this happens once losses have arisen for six successive years.
199.Subsection (3) sets out the exceptions to the restriction. Subsection (3)(b) provides that if the trade meets the “reasonable expectation of profit” test then the loss restriction does not apply.
200.Definitions of the terms “farming” and “market gardening” are to be found in section 1125.
Section 49: Reasonable expectation of profit
201.This section sets out the “reasonable expectation of profit” test which, if met, enables relief to be given that would otherwise be restricted under section 48. It is based on section 397(3) and (5) of ICTA.
202.“Profit” in section 49 refers to profit in its ordinary commercial sense.
Section 50: Cessation of trades
203.This section sets out the circumstances under which a trade is treated as having ceased. This is necessary in order to determine the length of the period during which losses have arisen in that trade for the purposes of section 48. It is based on section 397(8), (9) and (10) of ICTA.
204.Subsection (4) sets out the rules for determining whether certain individuals or companies are to be treated as the same person for the purposes of determining if subsection (1) applies.
Section 51: Companies treated as same person as individual
205.This section explains how to calculate losses for the purposes of section 48 where a trade has been transferred from an individual to a company but that individual and that company are treated as the same person by virtue of section 50. It is based on section 397(10) of ICTA.
206.Subsection (4) adapts rules in section 70 of ITA and section 203 of ITTOIA to deal with cases where profits or losses have not actually been calculated by reference to tax years. In such cases, the calculation of profits or losses for tax years is an arithmetical exercise, involving apportioning (on a time basis) the profits or losses of periods falling partly within the tax year, and combining these with the profits or losses of any periods falling completely within the tax year.
Section 52: Dealings in commodity futures
207.This section denies relief where losses have been made in a trade of dealing in commodity futures and certain other conditions are met. It is an anti-avoidance provision. It is based on section 399(2), (3) and (5) of ICTA.
208.Subsection (5) refers to a “recognised futures exchange” as defined in section 288(6) of TCGA. That subsection is reproduced here to avoid the need to cross-refer to that Act.
“(6)In this Act “recognised futures exchange” means the London International Financial Futures Exchange and any other futures exchange which is for the time being designated for the purposes of this Act by order made by the Board.”
Section 53: Leasing contracts and company reconstructions
209.This section restricts relief in respect of certain leasing arrangements. It is anti-avoidance legislation. It is based on section 395 of ICTA.
Section 54: Non-UK resident company: receipts of interest, dividends or royalties
210.This section prohibits the deduction of losses under section 37 or45 or under section 436A of ICTA to the extent that such losses arise to a non-UK resident company as a result of excluding certain kinds of tax exempt income from the company’s profits. It is based on section 808 of ICTA.
211.The source legislation was in Part 18 of ICTA (double taxation relief). The rewritten section is with other sections which restrict or otherwise affect the use of losses.
212.A non-UK resident company may utilise any losses that arise under section 37 or 45 provided that those losses are calculated on the basis that receipts of tax-exempt interest, dividends or royalties are included in the company’s profits.
