You were winding down your business with a view to closing the company in the next year or so but the lockdown has brought your plans forward. If your company makes a loss in its final period of trade how can it obtain tax relief for it?

When the end (of trade) comes

Where a company makes a loss in its final year of trading special rules apply to allow tax relief. This is because at least one of the normal options, i.e. to use the loss to reduce future taxable profits, won’t be possible. You can still choose to set the loss for the final accounting period against your company’s other taxable income or profits (if it has any) of the same or the previous year. This is known as “sideways loss relief”. The trouble is that if the loss exceeds these you won’t get full relief for it.

Tip. If you can’t get relief for the whole loss using sideways relief you can instead claim terminal loss relief. Note that you can’t claim this in addition to other loss relief; you must choose one or the other.

Terminal loss relief

Until April 2017 terminal loss relief could only apply to losses made in the final twelve months of trade. Since then, in very limited circumstances mainly affecting large companies, the relief can be increased by losses brought forward from earlier years. For now we’ll concentrate on the situation where the post-2017 rules aren’t relevant. Where you claim terminal loss relief you can use it to reduce tax on profits for the final three years of trade but working out the relief is not straightforward.

Calculating the terminal loss

Unlike sideways relief that relates to a loss for an accounting period, terminal loss relief relates to a loss in the final twelve months of trade which means it can and often does straddle more than one accounting period. The period of profits against which the relief is set is also based on years rather than accounting periods. These factors mean that often apportionment of the profits and losses for accounting periods is required.

Example. Acom Ltd’s taxable profits and losses are:

Accounting period ended;

30 June 2017 – 31,000 Profit (£)
30 June 2018 – 26,000 Profit (£)
30 June 2019 – 15,000 Profit (£)
31 May 2020 (cessation) – 33,000 Loss (£)

The loss falling in the final twelve months is £33,000 even though the final period of trading was only eleven months. The profit for the one month of the preceding accounting period (to 30 June 2019) is ignored. However, had it also shown a loss one twelfth of it could be added to the £33,000 thus increasing the amount of terminal loss relief that could be claimed. However, again assuming that the penultimate accounting period showed a loss rather than a profit, if sideways loss relief had been claimed for that loss the terminal relief would not be increased by one-twelfth because relief for the same loss can only be given once.

Using the loss

A terminal loss can be used for three years preceding the beginning of the accounting period in which the loss was incurred, as long as part of that accounting period falls within the twelve months prior to cessation of business. This means it’s possible for part of the loss to be carried back for more than four years prior to the date your company’s business ceases.

If the company has no other profits or income for the year in which the trade ends, or the one before, it can claim terminal loss relief instead. This extends the period for which loss relief can be claimed. Terminal losses can be deducted from taxable profits for the three years prior to the start of the accounting period in which the business ceased.

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