Carrying forward trading losses

[Tom Stevenson]

I am the majority shareholder in a relatively new business, which made a loss for the first 4 years and in 2017-18 made its first profit. I have just seen the accounts and noticed that the loss for 2016-17 has been carried forward to help offset the profit, but I am wondering why the losses from earlier years have not been carried forward to completely offset any profit. There might be a good reason for this, but before I ask my Finance Director, I would like to know in general what the maximum number of previous tax year trading losses that can be carried forward, so that I do not ask from a position of complete ignorance. Thank you.

 

[MyAccountantOnline]

I am the majority shareholder in a relatively new business, which made a loss for the first 4 years and in 2017-18 made its first profit. I have just seen the accounts and noticed that the loss for 2016-17 has been carried forward to help offset the profit, but I am wondering why the losses from earlier years have not been carried forward to completely offset any profit. There might be a good reason for this, but before I ask my Finance Director, I would like to know in general what the maximum number of previous tax year trading losses that can be carried forward, so that I do not ask from a position of complete ignorance. Thank you.

Have a read here it should give you all the information you need https://www.gov.uk/guidance/corporation-tax-calculating-and-claiming-a-loss

 

[Tom Stevenson]

I looked there first, but whereas there are many references to carrying forward (and backward) trading losses to offset profits there is no specific indication of how many years maybe carried forward (or backward).

 

[Tom Stevenson]

I am sorry if it is inferred in some arcane way that accountants understand, but I am not an accountant and I can find no specific statements about time limits, maximum number of years it is possible to carry trading losses from etc. As you were so quick and kind to reply initially, I took your silence follow-up reply to mean that I must be thick (not that I am suggesting you would say such a thing!) and that such references must be there, so I looked again, and I must be doubly thick because I still could not find anything, and lay it out before you below, so that I may be shamed (which if it is there, I deserve to be).

I followed your link to the document I had already consulted, and read this:

Carry forward a trading loss

Certain losses that your company has not used in any other way can be offset against profits in future accounting periods.

NO MENTION THERE, SO I CLICKED ON THIS LINK: "Find more information about carrying forward a trading loss" AND READ THIS:

Carry forward Corporation Tax losses

Find out about the type of losses your company can offset against profits in future accounting periods.

AND READ THIS:

Carry forward a trading loss

Your company can carry trading losses forward to deduct from profits of future accounting periods as long as the trade continues.

If your company is using a carried forward trading loss in an accounting period that ends before 1 April 2017, you can only use the relief against profits of the same trade.

Where your company is using a carried forward trading loss in an accounting period that starts on or after 1 April 2017, the situation depends on when your company made the loss in question. If your company made the loss:

before 1 April 2017, it can only be used against profits of the same trade
on or after 1 April 2017, it can normally be used against your company’s total profits

There are special rules for accounting periods that start before and end on or after 1 April 2017.

If your company is part of a group and has carried forward trading losses made on or after 1 April 2017, other companies in the group may be able to use those losses. This is called group relief for carried forward losses.

AS OUR TRADE REMAINS THE SAME, NOTHING IN THE "start before and end on or after 1 April 2017" LINK WAS RELEVANT, SO I CLICKED ON THE "Find more information about trading losses" LINK, BUT THAT TOOK ME BACK TO THE BEGINNING.

Where and how have I gone wrong?

Where does it say the maximum number trading loss years that can be carried forward?

 

[GLAbusiness]

I am not an accountant, but I take "of future accounting periods as long as the trade continues." to mean you can carry them forward for unlimited number of years so long as you still trade.

 

[Tom Stevenson]

Really? Thank you for your interest and bothering to respond. It would be good to get a confirmation of this from a certified accountant because, while I DO FOLLOW YOUR RATIONALE, I find it highly unlikely that if taken to its ultimate conclusion, a company who had not bothered to carry forward a loss 50-odd years ago could actually do so and HMRC would happily accept. I dare say that the six-year rule for company records might be applied, but frankly, I have never known HMRC to be so vague as to mean forever.

 

[GLAbusiness]

I'm guessing that the logic may be that a business will go belly-up if it is loss making for more than a few years.

 

[Tom Stevenson]

Just taking your rationale to its logical conclusion: Could have been a massive business 50 years ago, when it made a loss in just one year, forgot to set it against profits the next year, now it is a much smaller business, but essentially the same business plying the same trade, just the market has shrunk, and although that big loss 50 years ago is not worth the same now, it nevertheless represents such a significant sum for the much smaller business and because HMRC allows losses to be carried forward without any time restriction, it could cancel out any tax due this year, so that is what the company does. In the real world, I doubt that HMRC would allow this to happen, so there must be a time-limit somewhere and that is all my non-accountant mind is looking for, although I would love it if no time-limit actually exists, and you are 100% correct!

 

[BeanCounter101]

You can carry losses forward indefinitely, but as GLA says, significant losses over a number of years is probably not a business that would continue for too long. If the company "forgets" to carry losses and needs to amend previous Corp Tax returns, the statutory time limit is 2 years after the Accounting Period end date or 12 months after the filing date.

 

[Tom Stevenson]

So, to get back to my original question, there is nothing to stop my financial director carrying forward the losses from more than one of the three earlier years to completely offset all profit?

 

[BeanCounter101]

No, nothing to stop your FD doing that from the information provided. If there are taxable losses in years 1, 3 & 3 these should all have accumulated to use against future profits.
Taxable profits or losses are not necessarily the same as accounting profits or losses.

Are you part of a group? Or have you had R&D tax credits?