Overview on taxation of losses 

Limited companies and other organisations such as clubs, societies, associations and other unincorporated bodies have to pay corporation tax on the taxable profits they make.

The corporation tax is calculated at the end of every financial accounting year and must be paid to HM Revenue & Customs within nine months of your financial year end. A business should usually work out its own corporation tax liability and the self-assessment form must be submitted within 12 months of your financial year end to avoid incurring a penalty.

To work out your taxable profits for corporation tax you take your company's pre-tax profit figure then:

• deduct the total expenditure of an income nature - this must have been incurred wholly and exclusively for the purposes of the trade. It includes things like directors' salaries (though not dividends paid to shareholders) and the business’s contributions to employee pension schemes for the employees;
• subtract capital allowances claimed on expenditure on machinery and plant and on industrial buildings;
• deduct any corporation tax you have already paid;
• add any other relevant income or chargeable gains;
• deduct any other relevant deductions, reliefs, allowances or losses.

If after all these calculations you find that you have actually made a trading loss, your business you will be entitled to relief. By law, this trading loss can be deducted from the trading profits from previous or later years of the trade in the following ways: 

Carry-across relief

Your company's trading losses for an accounting period can be carried across to be subtracted from income or capital profits from any source for the same accounting period.

Carry-back relief for trading losses

If you haven’t made enough profits for the existing accounting period to absorb the trading losses, the losses can be carried back to be subtracted from income or capital profits from the three accounting periods leading up to the current accounting period. 

Carry-forward relief for trading losses

Your company's trading losses for an accounting period can be carried forward for an indefinite period to be deducted from profits that your company might produce in the future. This relief is more restrictive than the previous two options and is often considered the relief of last resort as it does not provide for relief against other sources of income or against capital gains. It is also generally regarded as less appealing because a business has to wait until future profits of the trade materialise before they can benefit from loss relief.

Carry-forward relief on incorporation of business

If you suffer trading losses and you transfer the business to a company wholly or mainly in return for shares in the company, the losses can be carried forward and deducted from income which you receive from that company, such as salary as a director or dividends as a shareholder. At least 80 per cent of the payment for the transfer must consist of shares in the company to qualify for this relief. 

Start-up loss relief

If you suffer a loss in any of the first four years of a new business, the loss can be carried back and deducted from any other of your income in the three tax years prior to the tax year of the loss. You can therefore claim back from the HM Revenue & Customs some income tax that you have paid in your employment in the previous years before starting your business.  

Terminal losses

If you suffer loss in the last 12 months of trade of a business you may be eligible for terminal loss relief. Relief is given against the trading profits - not other income – of the last three fiscal years of the business. You may then reclaim from HM Revenue & Customs tax that you have already paid.  

Partnerships

A trading company that takes another person into partnership, and continues to carry on the same trade, can carry forward any losses incurred by it in that trade before the formation of the partnership, and set-off the losses against its share of the partnership trading income. This treatment applies where the partnership comprises two or more individuals or companies of which one was the original trading company.