Using Losses to Reduce Your Corporation Tax Bill

Trading losses simply occur when your costs are more than your profits. They are not a desired outcome for any business. However, you can use these corporation tax losses for relief. This can be done by adjusting them against any of your profits. Here is everything you need to know about this.

Eligibility of corporation tax losses for relief:

You might often wonder,’ do you pay corporation tax on losses?’. Well, no, you don’t. However, to be eligible for corporation tax refund on losses, your business must have paid corporate taxes on profits. Then, in the present accounting year, it should have suffered losses. It is then eligible for relief. If your business is terminated, then corporation tax losses on cessation can also counted for corporation tax refund on losses.

“While profits are taxed, no immediate tax refund is granted if a corporation suffers losses. Losses can only be used to offset profits generated in other periods or by affiliated companies. The tax loss offset rules, however, significantly differ between countries. Almost all countries offer the opportunity to carry losses forward to subsequent periods.”

Daniel Dreßler

How to work out corporation tax losses:

Before working out corporation tax refund on losses, we must calculate corporate tax losses. To calculate corporate tax losses, adjust the accounting loss. It is shown in your company’s profit and loss statement. You have to use the rules of HMRC to do this. These changes bring the loss into line with what is tax-deductible. You should add the following while calculating your corporation tax loss.

1. Capital allowance

These are tax reliefs for the purchase of corporate assets. They can contribute to corporation tax refund on losses. It includes machinery, equipment and vehicles. In your tax calculations, these allowances replace depreciation. The effect of capital losses is to increase the tax losses. This is because depreciation is disallowed and capital allowances are deducted instead.

2. Balancing charges

When an asset is sold for more than its tax write-down value (but less than the initial cost), it gives rise to balancing charges. It is a taxable profit, and it has to be added back. The effect of balancing charges on corporation tax losses is to reduce the loss since the gain is treated as taxable income.

3. Trade charges

These include certain types of insurance premiums and payments for registered pension schemes. Any kind of charitable donations that are qualifyable by the HMRC are also included. Trade charges increase corporation tax losses. This is because they are considered allowable expenses under corporation tax rules. They can be carried back to a previous accounting period to generate a corporation tax refund on losses.

4. What not to include:

You cannot include the following while calculating these losses:

•  Capital Gains or Losses: They are profits or losses that you get when selling fixed assets. These assets include land, buildings, or shares. They are dealt with under the chargeable gains regime.

• Non-trade Income or Expenses: This type of income and expenses includes investment income or fines and penalties. These monetary aspects are not linked to the company’s trading, so they are not included in calculations.

Disallowed Expenses: Certain costs are not deductible for corporation tax. They include client entertainment or excessive director salaries. They should be added back to profits or losses.