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Business Tax  •  capital allowances  •  capital gains tax (cgt)  •  Personal tax  •  Personal Taxation  •  Tax Planning  •  Tax Relief

Turn a loss into a windfall – the key is knowing the rules

By RJP LLP on 27 September, 2013

If a company is lossmaking it is possible to generate a corporation tax refund by offsetting those losses against profits of the previous year. If there are no profits in the previous year the company can carry forward those losses and offset them against future profits.

Alternatively if the company is a member of a group there are further options available to utilise those losses because losses incurred by one company within a group can be offset against profits of another.

It is important that a company is aware of all of these options because if they are not utilised the company could find either its paying too much tax or not optimising the benefits that are available.  We have encountered a variety of situations where a company or individual could have claimed relief for losses incurred but was unaware of the opportunities available until we identified them during our tax review. In each case, the amount of tax reclaimed was a significant sum of money that otherwise would have been lost. It is therefore well worth making sure you take advice on the options available  as HMRC is under no obligation to inform taxpayers of their eligibility to claim for losses or apply for a rebate - the responsibility for managing your tax affairs lies with you!

Common types of losses that can be claimed

1. Group Relief

Group relief enables companies to transfer losses, and certain other deficits, to companies within the same group (ie any company that is more than 75% owned by the same parent entity). By transferring losses between group companies the tax affairs of the group can be managed to ensure corporation liabilities are minimised whilst cashflow is optimised.

Making the most of group relief can be a complex area because it involves reviewing the tax position of the Group as a whole and comparing past and current tax rates to calculate the best course of action to minimise tax liability. In some cases, best  use of group relief has been to help a company avoid having to enter HMRC’s quarterly payment regime and avoid the negative effect this can have on cashflows.

2. Terminal Loss Relief

This is an extension of the normal loss relief rules and is available where a company ceases to trade. Where a company is struggling financially and ultimately ceases trading it is possible to offset any losses made during their final trading period against profits made during the previous three financial years (rather than against the previous 12 months which is the usual rule). So called Terminal Loss Relief is a particularly valuable relief and something many company owners fail to take advantage of.

For example, RJP recently advised a firm of insolvency practitioners who were responsible for winding up a company that had entered administration. Unsurprisingly, this business had made a loss during its last period of trading and RJP advised the administrators of the potential to secure terminal loss relief by carrying the losses of the final period back and offsetting them against the profits of the preceding three years. This resulted in a tax refund of over half a million pounds, which ensured that many more creditors were repaid. If a claim had not been made, HMRC would simply have kept this money and the company’s creditors would have lost out.

3. Capital Allowances on purchases or refurbishment of commercial premises

Companies considering the purchase of commercial property or refurbishment of their premises should be aware of the potential to benefit from claiming capital allowances. Typically this type of capital expenditure is ignored when looking at claims for tax relief as there is a mistaken belief that costs of these nature do not qualify as plant and machinery (the prerequisite for a capital allowances claim to be made).

The common mistake is to assume that nothing within the purchase price of the building qualifies as plant and machinery, but actually a specialist will normally be able to identify a proportion of the spend which does qualify for tax relief because it relates to, for example, air conditioning, wiring and plumbing.

This type of review requires specialist knowledge and therefore RJP recommends working with experienced property surveyors to carry out the review, complete the necessary due diligence and provide robust back up to support any claims.

In addition to picking up costs which qualify for claiming for capital allowances, a detailed review of this expenditure will also identify costs which have been treated as capital but which actually qualify as revenue and therefore will benefit from immediate tax relief.

RJP has recently been advising a large professional services firm who moved to new central London offices. Prior to relocating, the firm embarked on a major refurbishment exercise totalling £350,000.

By reviewing the expenditure in detail we were able to identify a significant portion of the costs which qualified for tax relief and secured savings in excess of £100,000 for the partnership. Without a tax review and subsequent claim these tax savings would have been lost.

Even if the property was bought (or the refurbishment took place) in a previous accounting period it isn’t too late to make a claim now (the business doesn’t have to own the property to be able to claim tax relief for costs incurred).

The rules in this area are currently being tightened so it is important to review this opportunity as soon as possible if you feel it may be appropriate.

4. Claiming for personal losses on investments

Although the article has focused on claiming tax relief for companies and businesses that incur losses there are opportunities available for individuals to offset t losses against income. Where a taxpayer has purchased shares in a fledgling or unquoted company and that investment becomes worthless there may be scope to convert what were originally capital losses into a loss that can be set against income. This can be very valuable as not only is income taxed at a higher rate than capital, but the taxpayer may not have any capital gain against which to offset the losses.

Identifying the qualifying criteria for converting a capital loss into an income loss can be complex and advice should be sought to avoid the possibility of rejection of the claim by HMRC and either an enquiry or having to repay tax previously repaid.

For more information on utilising business and personal losses for tax planning purposes, please contact Lesley Stalker by emailing las@rjp.co.uk.

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This can save you time and money, plus we can advise on matters related to inheritance tax at the same time.