Corporation Tax Loss Relief: Carry Back, Forward, and Terminal Claims

Corporation tax loss relief lets a UK company turn a trading loss into a tax saving in one of three ways: offset it against other profits of the same accounting period, carry it back 12 months to reclaim tax already paid, or carry it forward against future profits. With the main rate of corporation tax at 25% for companies earning above £250,000, even a modest loss is worth relieving properly. The rules changed on 1 April 2017, and losses arising from that date onward are significantly more flexible than older ones.

Using the Loss in the Same Year

The first option is usually the most valuable because the cash effect is immediate. Under section 37 of the Corporation Tax Act 2010, a company can deduct a trading loss from its total profits for the same accounting period, not just from profits of the same trade.¹ Total profits here covers everything the company earned in the period: trading income, investment returns, rental income, and chargeable gains. The deduction can bring taxable profits all the way down to zero.

A profitable first half followed by a loss-making second half is the classic case. The loss from the bad half wipes out the profit from the good half, and if the company had already paid tax on account, that overpayment comes back.

Carrying the Loss Back for a Refund

If the loss is bigger than the current period’s profits, the surplus can go back 12 months. Section 37 allows the carry-back, but the company must have been carrying on the same trade in the earlier period, and the trade must not have been conducted wholly outside the UK.¹ The loss is applied to the earlier period’s profits only after that period’s own in-year reliefs.

The claim must be made within two years of the end of the accounting period in which the loss arose.² Miss it, and the loss can only go forward. The payoff is a refund of corporation tax already paid, which often matters most to a company dealing with a sudden downturn.

Carrying the Loss Forward

Any loss you do not use in the current year or carry back automatically survives to be set against future profits. How flexibly depends on when the loss arose.

Losses From Before 1 April 2017

Older losses follow more restrictive rules. They can only be carried forward against profits of the same trade. A company running two trades and losing money in one of them before April 2017 cannot use that loss to shelter profits from the other trade or from investment income.³

Losses From 1 April 2017 Onward

Newer losses are far more useful. Under section 45A of the Corporation Tax Act 2010, a trading loss arising on or after 1 April 2017 can be carried forward and set against the company’s total profits, whatever trade generated them.⁴ The 2017 reform extended the same flexibility to non-trading loan relationship deficits, management expenses, UK property losses, and losses on intangible fixed assets.³

The £5 Million Deductions Allowance

The same reform capped how much carried-forward loss a company can use each year. Every company gets a deductions allowance of up to £5 million. Profits within that allowance can be fully offset. Above £5 million, only 50% of the remaining profits can be sheltered by carried-forward losses.⁵ The restriction only touches losses brought forward. Current-year relief and carry-back claims are unaffected. For most small and mid-sized companies the £5 million allowance means the cap never bites.

Terminal Loss Relief When a Trade Ends

When a company permanently ceases a trade, the normal 12-month carry-back window widens. Section 39 of the Corporation Tax Act 2010 allows a terminal loss to be carried back against profits of the previous three years, applied to the most recent year first and working backward.⁶

The terminal loss is calculated from the final 12 months of the trade. If the last accounting period began within those final 12 months, the whole loss of that period qualifies. If a period only partially overlaps, only the proportionate share counts.⁶ This is one of the most generous reliefs available and often overlooked. A company winding down after several profitable years can recover a meaningful amount of tax previously paid, so it pays to model the numbers before locking in the cessation date.

Where Trading Loss Relief Does Not Reach

Not every loss a company incurs is a trading loss, and the rules above do not travel across categories cleanly.

Capital losses, which arise when a company sells an asset for less than its allowable cost, sit under the Taxation of Chargeable Gains Act 1992.⁷ They are ring-fenced: usable only against chargeable gains, never against trading profits or other income, and they carry forward indefinitely until gains appear. A trading loss can sometimes be redirected against chargeable gains once other income has been covered, but the flow does not run the other way.⁸

UK property business losses have their own route. Under section 62 of the Corporation Tax Act 2010, a loss from a UK property business carried on commercially can be set against the company’s total profits for the same period, and any unused balance carries forward against total profits of later periods.⁹ The commercial basis test matters. A property let at a nominal rent to a family member cannot generate a relievable loss just because expenses exceed the rent.¹⁰

Sharing Losses Within a Group

Losses stuck in one company can often be moved to a profitable sibling. Under Part 5 of the Corporation Tax Act 2010, one group company can surrender a trading loss to another, which claims the relief against its own profits for the corresponding accounting period.¹¹

Two companies form a group when one is a 75% subsidiary of the other, or both are 75% subsidiaries of a third company. The 75% test looks at ordinary share capital, entitlement to distributable profits, and entitlement to assets on a winding up.¹¹ Group relief is not limited to trading losses. It also covers non-trading loan relationship deficits, management expenses, and UK property losses.

How a Change of Ownership Can Block Relief

When a company changes hands and the new owners take it in a materially different direction, HMRC can shut down the use of historic losses. Section 673 of the Corporation Tax Act 2010 restricts relief where, within any five-year window surrounding the ownership change, there is a major change in the nature or conduct of the trade.¹² The provision exists to stop “loss buying,” where a profitable business acquires a loss-making shell mainly to absorb its losses.

A major change can include shifting the types of products or services the company provides, or a significant overhaul of its customer base or markets.¹² The rule also applies where a trade has already gone dormant before the ownership change and is then revived by new owners. The five-year window can catch gradual shifts that began before the sale. Anyone buying a company partly for its losses should get specialist advice before completing.

Making the Claim

Claims for trading loss relief go on the company’s CT600 tax return, either in the original submission or in an amendment made within the time limit. HMRC’s guidance sets out the specific boxes to complete for a current-year claim, including the box for the full loss and the box for the amount being claimed against total profits.² The return must be filed electronically.

Before you file, pin down the exact start and end dates of the loss-making period, because those dates decide which rules apply and which earlier periods sit within the carry-back window. Calculate the loss precisely, adjusting for capital allowances and any expenses that are not tax-deductible. If you are carrying back, you also need the taxable profit figures from the earlier period.

Deadlines

The deadline for a carry-back or current-year claim is two years from the end of the accounting period in which the loss arose.¹ HMRC has discretion to accept a late claim, but that is not something to rely on. Carried-forward losses do not have the same hard deadline because they are claimed on the return for the period in which they are used, but the underlying loss must have been properly reported in the period it arose.

Penalties if You Get It Wrong

Overstating a loss or claiming relief you are not entitled to can trigger a penalty based on the behaviour behind the error. HMRC grades errors by seriousness:

Careless errors carry penalties of 0% to 30% of the tax that should have been paid.
Deliberate errors carry penalties of 20% to 70%.
Deliberate and concealed errors carry penalties of 30% to 100%.

Penalties are reduced when the company discloses the mistake voluntarily, cooperates with any enquiry, and gives HMRC access to records. A prompted disclosure of a careless error can bring the penalty down to as low as 15%.¹³ How much you tell HMRC, how quickly, and how fully drives where you land within each band.

1
Legislation.gov.uk. Corporation Tax Act 2010 Section 37
2
GOV.UK. Work Out and Claim Relief From Corporation Tax Trading Losses
3
GOV.UK. Corporation Tax Reform of Loss Relief
4
Legislation.gov.uk. Corporation Tax Act 2010 Section 45A
5
HM Revenue & Customs. Company Taxation Manual CTM05010 – Corporation Tax Restriction on Relief for Carried-Forward Losses Introduction
6
Legislation.gov.uk. Corporation Tax Act 2010 Section 39
7
Legislation.gov.uk. Taxation of Chargeable Gains Act 1992
8
GOV.UK. Business Income Manual BIM85030 – Trade Losses Types of Relief Against Chargeable Gains
9
Legislation.gov.uk. Corporation Tax Act 2010 Explanatory Notes – Property Losses
10
GOV.UK. Property Income Manual PIM4205 – Losses Overview
11
Legislation.gov.uk. Corporation Tax Act 2010 Part 5 – Group Relief
12
Legislation.gov.uk. Corporation Tax Act 2010 Section 673
13
Legislation.gov.uk. Finance Act 2007 Schedule 24