Hi there. Last week we spoke about the warehousing of non-Covid-19 tax debt. The deadline to warehouse is the 30th of this month. In case you missed it Read here
This week we are going to look at losses in your company and how to use them to help you limit your tax liability. The aim is to give you a basic overview of how to use losses so that they are not lost and that you get tax relief asap. We will look at some examples to explain what we are talking about.
Losses in the current year
Donald & Joe limited run a company with two trades. One is a public relations business. The other is a construction business that has a niche in building large walls. They had a lot of costs in the PR business in the year ended 31 December 2019. The construction business was successful as they did well on a contract to build a wall on the border. The company also owns some units which they rent out. The results were as follows;
| Loss in the PR Business | (€100,000) | |
| Profit in the Construction Business | €60,000 | |
| Rental Profit | €28,000 |
If we ignore the loss at first the company would pay tax as follows;
| Construction Business | €60,000 x 12.5% | €7,500 |
| Rental Profit | €28,000 x 25% | €7,000 |
| Total Corporation Tax | €14,500 |
Now to use the losses. We can offset the losses in the PR business against the construction business
| Profit in Construction Business | €60,000 | |
| Less losses in PR Business | (€100,000) | |
| Balance of losses available | (€40,000) |
We can use this balance of losses against the rental profits on a value basis. The value of the excess of the trade losses at 12.5% is €5,000. Remember the tax rate on trading profits is 12.5% so the value of trading losses is at the same rate.
| Rental Profit | €28,000 x 25% | €7,000 |
| Losses on a value basis | €40,000 x 12.5% | €5,000 |
| Corporation Tax Payable | €2,000 |
Carry back to the previous year
What happens if you maximise the losses in the current year and there are more losses available. If we look at the previous example but assume that Donald & Joe Ltd had losses of €200,000 in the year 31 December 2019. The balance of losses after offset against the construction profits is €140,000. We use those losses on a value basis to reduce the tax on the rental profit to nil as follows
| Rental Profit | €28,000 x 25% | €7,000 |
| Losses on a value basis | €56,000 x 12.5% | €7,000 |
| Corporation Tax payable | €0 |
The losses were used as follows
| Profits in the Construction Business | €60,000 | |
| Less losses in PR Business | (€200,000) | |
| Balance of losses available | (€140,000) | |
| Losses used on a value basis | €56,000 | |
| Balance of losses available | (€84,000) |
The profits & tax paid for the year ended 31 December 2018 in Donald & Joe ltd were as follows
- Profit in the Construction Business €30,000
- Profit in the PR Business €40,000
- Rental Profit €30,000
The corporation tax paid was
| Trading profits | €70,000 x 12.5% | €8,750 |
| Rental Profits | €30,000 x 25% | €7,500 |
| Corporation Tax | €16,250 |
In the first instance, we offset the excess losses in 2019 of €84,000 against the trading profits of 2018. The trading profits of €70,000 are now nil and there is a CT refund of €8,750 due to the company.
The balance of the losses of €14,000 is then offset against the rental profit on a value basis.
| Rental Profit | €30,000 x 25% | €7,500 |
| Losses on a value basis | €14,000 x 12.5% | (€1,750) |
| Corporation Tax payable | €5,750 |
The total refund for 2018 will be €10,500 which is €8,750 from the trading profits and €1,750 on the rental profits.
Carry forward of Losses
Using the previous example but let’s assume the loss in the PR business in 2019 was €300,000. I know we are doing a lot of assuming but stick with us! This would mean that the balance of losses carried back to 2018 was €184,000. They would reduce all the profits in 2018 to nil as follows
| Trading Profits [Construction & PR] | €70,000 | |
| Less losses carried back | (€70,000) | |
| Rental Profit | €30,000 x 25% | €7,500 |
| Losses on a value basis | €60,000 x 12.5% | (€7,500) |
Of the €184,000 of losses available we have used €130,000 in 2018 which leaves a balance of €54,000 unused. It is possible to carry forward these losses to future accounting periods. The first accounting period in which they are available for use is the year ended 31 December 2020. The rule, in this case, is that the losses are only available for use against profits of the same trade. This means it is only possible for Donald & Joe Ltd to use the losses against profits of the PR business in 2020.
The results for Donald & Joe Ltd in the year ended 31 December 2020 were as follows;
- Profit in PR Business €34,000
- Profit in Construction Business €40,000
- Rental Profit €25,000
The losses of €54,000 carried forward are offset as follows;
| Profit in PR Business | €34,000 | |
| Less losses carried forward | (€54,000) | |
| Balance of losses to 2021 | (€20,000) | |
| Profits in Construction Business | €40,000 | |
| Rental Profit | €25,000 |
As you will see that it’s not possible to use the losses against the profits of the Construction Business or the rental profit. The excess losses of €20,000 can go against profits from the PR trade in 2021 and future years.
Summary
There is a set order of how you offset losses as you can see from the above examples
- Set-off against profits of the trade in the current accounting period. Then set off, on a value basis, against other income of the business in the same period. This could be against rental profits, dividends, or capital gains
- Set-off against profits of the trade in the previous accounting period. Then set off, on a value basis, against other income of the business in the same prior period.
- Carry forward against profits of the same trade in future accounting periods.
It is vital that you submit the Corporation Tax returns on time. Failure to do so, not only results in a surcharge of up to 10% of the tax liability but also limits the use of losses. The surcharge and losses restriction is currently set-aside as a support to business. Read here
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